Tips on Buying Cars/negative equity


QUESTION: I am in a car lease and am 21 months in. I have 15 months left. The dealership told me the other day that if i were to try to trade in now, that there is $3000 in negative equity because right now it is worth less than the current payoff amount. They said that if i were to wait until i had 6 months left, or until the end of the lease, that there wouldn't be negative equity and that I am doing everything right. I make all my payments on time and would really like to purchase the car at the end of the lease or maybe trade it in. my question is, is this true? will the negative equity go away? i am afraid that come time to buy the car i am leasing, they won't let me because of "negative equity" and the car won't be worth the lease-end payoff amount.

car guy
car guy  
ANSWER: Hi Lauren,

Yes the dealer is telling you the truth... Thats oner of the nice things about leases ....there is never any negative equity at the end and the end is usually 3-4 years and not 6-7 years (like a purchase) As you have probably heard depreciate the fastest when they are brand new...thats why you have negative equity din't say who your lease was through but if it was through a regular bank vs a captive lender (like Ford Motor Credit , Honda Financial etc) then the odds are that you will probably have positive equity at the end ...with a captive lender ...not so much so. ...running to dinner ... I would ride the lease out for another 12 mos and see where you are ... let me know if you have any follow up questions and i will answer them when i get back from my late dinner... thx

---------- FOLLOW-UP ----------

QUESTION: i was actually going through Toyota Financial Services. i hope i still have a shot at actually buying this car or trading out of it. especially since i have done what i am supposed to the entire time so far.

ANSWER: At the end of the lease you are absolutely guaranteed the right to buy the car or trade out of it ...Here is the thing about captive lenders: They exist for the sole purpose of supporting the dealers in the sale of their own vehicles both new and used ...but especially new ones. To do that they will often times have unrealistically high residuals ...but usually its extremely low money factors. Their leases are usually very short (24-39 mos) because they want you to buy another new car. At the end of the lease you will need to see if you have any equity in your car and if you do and you want a new one then you can trade it in and capture that equity and if you don't have equity or have disequity then you can terminate the lease and let Toyota Financial Services deal with it.

---------- FOLLOW-UP ----------

QUESTION: last question sir, and thank you for your time. what if i decide to buy the vehicle i am leasing? will having no positive equity affect that? i guess i am hoping that i am able to at least buy the current vehicle i am leasing so i don't get left without a vehicle. i plan on having a down payment as well saved up by that time.

Let's assume for a second that when this lease ends in 1 1/2 years that your car is worth $10,000 and your lease end value (LEV)...the value you can buy the car for is $13,000 and you decide that since you know the car and took good care of it etc that you wanted to keep this car then Toyota Financial will be thrilled to have you keep it and provided you have paid them on time every month they will finance the purchase for you. Most of the time when there is disequity in a leased vehicle at lease end its because the person has gone way over her allocated miles. Don't forget to factor in any applicable mileage penalty when figuring which way you are going to go.  

This brings up an interesting option that most people don't know they have or don't know about. As your lease starts to come up on it's termination date you will start to get mail from TFS asking you what your plans for the car are. If your car is worth less that it's lease end value like in the example above and you want to keep the car you can tell TFS that the LEV of 13k is too high because the market value is only 10k and you would be willing to purchase the car for 10,500 but at 13k they can have it back ...they will often times either accept your offer or make you a counteroffer ...when that time comes shoot me an email and I will tell you how to handle them to get the best price.  

You can ask as many follow ups as you want ... :)

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Roger Alvey


I can answer any question about the car buying process. I am a recognized industry expert on all issues regarding auto finance, including sub prime and buy here pay here financing, I can answer questions about car lock out systems, GPS monitoring by your bank, and about auto recovery methods and defenses. I am a 20 yr car industry expert and can tell you what to look for in a used car, how to negotiate the deal, help with how to market your own car, and how to negotiate with the internet department of any car store. I can tell you every single way the dealer is set up to beat you and how to avoid those traps, I can discuss all aftermarket and extended service contract products you will be offered in the finance process, I have lectured extensively on "The Best Way to Buy a Car" to civic groups and university students. I am a credit expert and can tell you what the dealer and banks are looking for and the rate you can expect to pay. HERE IS THE LINK TO MY OTHER ALLEXPERTS CATEGORIES WHERE I HAVE ANSWERED LOTS OF QUESTIONS HERE IS A LINK TO MY BLOG


20 years industry experience in top management of dealerships and dealer groups. Recognized industry expert since 2004 in the Top 10 industry experts for The Gerson Lehrman Groups Auto Industry Council. I also do consulting work for Atheneum Partners, Expert 360, Expert Connect and Coleman Research. I have been a franchise owner and understand all facets of the auto industry from the time the car leaves the factory until it leaves the lot with it's new owner. I have written training materials for both the prime and the subprime sales and finance process.

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