How do I assess negative/positive equity in my current car?


#1

Let’s say you’re currently in a leased car and you want to get out. You need to evaluate what your equity position is. With a leased car, the lender may quote different numbers, so you want to find out what your payoff is without tax if possible. A lot of lease lenders quote payoffs including tax, so that can be very misleading. If you trade in the car or sell it to another dealer, there should be no tax payable by you. Even if you sell the car yourself, you should be able to avoid paying tax.

Step 1: Call your lender and ask what the payoff is to you, the lessee, without tax. Ask if the payoff is lower or higher for a dealer of the same make (they might not tell you, or they might tell you to contact a dealer). Sometimes the dealers of that brand get a preferred payoff. For example, a Chevrolet dealer might get a preferred payoff on a Chevrolet, Buick, or Cadillac. A Ford dealer might get a preferred payoff on a Lincoln like he might on a Ford. Ask if the payoff is different for a third party dealer, like to a Toyota dealer on a Honda lease. Carvana, Vroom, and Carmax are third party dealers. Sometimes lenders charge more, especially to third party dealers or private third parties, like a individual buyer. Don’t assume your payoff doesn’t include tax - it might, and that’s misleading. Don’t assume your payoff will be the same as a dealer for the same brand will get, or what a third party or individual will have to pay.

Step 2: Find out what your car is worth. KBB is a good resource, but be careful. Their values can be optimistically high. Look at trade-in values. Don’t choose excellent condition- it’s even more unrealistically high (this is just my experience). Lately, Carvana/Vroom/Carmax generally make the best offers. You have to go to a Carmax dealer to get a bid. Even KBB will get you bids from affiliated dealers.

Sometimes a dealer for the make of car you have is the most motivated and willing to pay more. They might make it a Certified Pre-Owned car (CPO). Sometimes they know more about the car and will offer less. Call a few dealers, ask for the name of the used car manager first, then make sure you’re talking to that person. A used car manager should be able to give you a number over the phone based on as-described. One dealer might be more motivated than another.

Tire condition is important and keep in mind tires look better than they really are. Good tires to your eye will often be nearly worn out and in need of replacement to an experienced appraiser. Tires are a big deal- you’re looking at a $600-1,500 swing in the value of the car if it needs tires. Tires usually have around 11/32" of tread when new. Consider them excellent with 8-11/32", good with 6-7/32", fair with 4-5/32", and poor with less. A tire store can measure them for you, or you can buy a gauge at an auto parts store- they’re cheap. Use the minimum tread from all across the tire. Tires worn unevenly probably need replacement.

Step 3: Look at your equity situation and decide what to do. Compare it to making all the remaining lease payments, plus the disposition fee (there usually is one), plus the charge for excess miles and excess wear and tear. You’ll probably have to have the car inspected to get a hard number. Look at your lease contract to see the definitions. Example- payoff $20,000, best offer $17,000, remaining payments/disposition fee/excess miles and wear $1,500. In this case, turn the car in early and make your remaining payments and charges and complete your obligation.

Step 4: If you’re leasing the same make again, see if that manufacturer offers a pull ahead or other incentive. It could be nothing, or it could be up to 9 months. Not often, but sometimes other manufacturers offer pull aheads. For example, Jaguar might offer to make up to the last 6 payments on your BMW if you lease a Jaguar. A lot of manufacturers will forgive the disposition fee if you lease another one of their cars. Sometimes they’ll offer an allowance against excess miles or wear and tear.

Step 5: Consider the pros and cons of getting out early. Getting rid of a leased car early at a cost might be worth it if it keeps you from buying tires or brakes, paying for an expensive service, or risking being out of warranty. If you’re going over on your miles, your cost can be increasing by 15-25 cents/mile. For 1,000 miles/month, that’s $150-250/mo (if you return the leased car to the lender)!

A lot of people on this forum consider it a big no-no to roll negative equity into another lease. Just like anything else, you can take your lumps and come up with the cash, or you can finance it. If the money factor is low, it’s like a low interest rate loan. All you save by coming up with the money now is the interest and tax on the negative equity. If you don’t have the money, you don’t have the money. Measure the value of getting out early.

Consider the cost of keeping the currently leased car. As an example, if you have 12 payments of $300 each remaining on your old lease and $3,600 negative equity, consider driving the old car most/all of the way to the end of the lease. If you roll $3,600 negative equity into your new car, you’re basically double paying for $3,600. You could drive your old car for $300/mo vs adding $3,600 to your new car amount financed. Get the new car when the old lease ends- get the use of a car vs making another payment that includes the cost of the old car. Hopefully that makes sense. If you’re going over on your allowed miles (and will have to pay for that if you return the car) or have to pay for tires, etc, those are arguments favoring getting out early.

Step 6: Consider selling the old car yourself. Generally, you’ll get another 10-20% more for your car if you sell it yourself for a good price. Subtract from that difference the amount of overbid from someone like Carvana, Vroom, or Carmax. For example, if everybody is offering you $15,000 for your car except one bid at $16,000, and you can sell the car for $17,000, is it worth the hassle? Or if your best bid is $25,000 and you can sell it for $28,000, is it worth the hassle? I’ve seen everything- people who will sell a car themselves to get $500 more for their car and people that will trade a car in without hesitation when they can get $3,000 more themselves. It’s a personal choice.

If you sell the car yourself, you should use the buyer’s money to payoff the lease and kick in a cashier’s check to cover the payoff if necessary. You might have a limited time to resell the car before you are liable for the tax (in CA it’s 10 days). You might not be able to sell the car in time to avoid being liable for the tax if you pay it off yourself.

Conclusion: A leased car has a payoff, just like a purchased car does. Make sure you’re not looking at an artificially inflated payoff that includes tax. Payoffs can be different depending on who’s making it. Spend as much time as it’s worth to you to find the best bid on your car. There’s a convenience factor if the dealer leasing you the new car gives you the same or similar amount to your best bid. You don’t want to find out your high bidder flakes out on their offer after you’ve gotten the new car. When you trade the car in for the same or similar price, you know all the transactions are done at the same time.


Trading in lease early
#2

giphy-1


#3

nice write-up.
For step 4, I think it’s worth noting that one should seek a real pull-ahead program from the manufacturer, and not fall prey to misleading dealerships that just roll negative equity into the new lease but disguise it as a pull-ahead offer.


#4

All excellent points, @KD6-3.7. To protect myself, I always create a lease amortization schedule and include it with your step 1

Lease Amortization Schedule

This reflects my contractual lease balance and not necessarily what a dealer would pay to acquire the vehicle. Honda sends me a monthly statement, which includes my lease balance. It always tracks with my amortization balance give or take a penny or two.