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7 Ways Dealerships Can Help Customers with Negative Equity
In the world of automotive sales, trade-ins are a common part of the buying process. However, a significant challenge that both dealerships and customers face during this transaction is negative equity. In this discussion, we explore the concept of negative equity in trade-ins and how dealerships can offer assistance.
Understanding the Causes of Negative Equity
Negative equity happens when the appraised value of a trade-in vehicle is less than the amount the customer owes to whomever financed their vehicle’s purchase. This situation is now quite common, and recent statistics suggest that a significant percentage of customers, often ranging from 20% to 40%, find themselves in this difficult situation when they come to trade in their vehicles.
Causes of negative equity:
- Depreciation. Some vehicles depreciate very quickly, losing a substantial portion of their value in the first few years of ownership. This is especially true of ‘high-end’ vehicles that are in low demand due to cost of ownership.
- Long Loan Terms. Extended loan terms lead to slower equity build-up as the vehicle's value decreases faster than the loan balance. To avoid this situation, customers should consider leasing as an alternative if their financial position supports leasing.
- Minimal Down Payments. Low or no down payment options at the time of purchase mean higher initial loans and leave more outstanding debt. Customers should put down at least 20% to avoid being in this situation.
- Maintenance and Accident History. A car that has not been maintained well or has a documented history of being in accidents may appraise lower than expected.
7 Ways Dealerships Can Help Customers with Negative Equity:
- Offer Equitable Appraisals. Dealerships can start by ensuring their appraisal process is fair and transparent. Providing a thorough explanation of how vehicle values are determined can help build trust. ‘Kicking the trade’ is not a good method of making a deal with a customer in a negative equity position as some loan companies or banks won’t allow a customer to have two simultaneous vehicle loans outstanding. Telling a customer to sell their vehicle privately also causes the dealership to miss a quality vehicle they can retail from their used vehicle display.
- Explore Manufacturer Incentives. Dealers can guide customers to promotions or incentives that effectively address negative equity, such as cash-back offers or special financing rates if qualified.
- Flexible Financing Options. Offering flexible financing options can help absorb the negative equity. For example, dealerships can suggest structuring new loans that incorporate the remaining debt from the trade-in. Some dealerships may decide to take part of the Gross Profit from the sale to cover the customer’s negative equity position.
- Shorter Loan Terms. Advising customers on choosing shorter loan terms for future purchases can help prevent negative equity scenarios by increasing equity faster. Dealerships can also assist customers by having the customer consider a less expensive vehicle to purchase for lower monthly payments.
- Educate on Vehicle Value Preservation. Counseling customers on how to maintain their vehicles to retain value, such as regular servicing and how careful driving habits can lessen depreciation caused by documented accidents.
- Lease Return Options. For customers repeatedly facing negative equity, leasing a new vehicle might be an attractive option. Dealerships can explain the benefits of leasing, including lower monthly payments and easier transitions to new models, if the customer qualifies for a lease.
- Advice on Early Loan Pay Off Strategies. Educating customers on techniques to pay their vehicle loans down faster, such as making extra payments, can also help reduce or eliminate negative equity over time.
Final Thoughts
Through empathetic and thoughtful engagement, dealerships have the opportunity to turn a stressful situation into a positive one for their customers. By utilizing strategic approaches and consistently transparent communication, dealerships not only assist in easing the burden of negative equity but also build lasting relationships with their clients.
As the automotive industry continues to evolve, innovative solutions towards addressing negative equity are key for a continued future for quality vehicle trade-ins.
Author - D.G. Berlie
D.G. Berlie has over forty years of experience in automotive business management consulting and associate and executive coaching.
