What is Negative Equity when Buying a Truck?
Let’s say a Truck Driver is looking to trade in his current truck at his local dealership to step into a newer more reliable truck. Negative equity will occur if the dealership offers a trade in value on the truck that is lower than what the payout figure is on that same truck.
For instance, a dealer offers a customer $120,000 for a trade in value on their truck, but the payout figure (amount still owing) on the truck is $135,000 – the negative equity component is $15,000.
Example of Negative Equity Based on the Above Scenario
| Purchase Price of New Truck | $285,000.00 |
| Less trade allowance | $120,000.00 |
| Add payout on trade | $135,000.00 |
| Total Amount payable | $300,000.00 |
| Negative Equity Amount | $15,000.00 |
In this instance, client would require finance approval for $300,000 when the value of the truck being purchased has an invoice price of only $285,000.
If the situation of negative equity occurs, it is problematic when looking to source suitable truck finance approvals. Reason for this, is that if the negative equity is added to the loan amount of the new truck, the financier is advancing more than the market value of the asset. From the perspective of the finance company, the market value of the truck is what is on the invoice price issued by the truck dealer.
How to Remove Negative Equity?
Below are a few ways in which to absorb this negative equity amount, so that the transaction can proceed without problems;
Option One
Client to drive up the price offered by the dealer on their trade, so that the trade value to equal the payout figure
| Purchase Price of New Truck | $285,000.00 |
| Less trade allowance | $135,000.00 |
| Add payout on trade | $135,000.00 |
| Total Amount Payable | $285,000.00 |
| Negative Equity Amount | NIL |
Option Two
Client to use own funds to make up the $15,000 difference.
| Purchase Price of New Truck | $285,000.00 |
| Less trade allowance | $120,000.00 |
| Add payout on trade | $135,000.00 |
| Less customer deposit | $ 15,000.00 |
| Total Amount Payable | $285,000.00 |
| Negative Equity Amount | NIL |
Option Three
Have the dealer increase the value of the new truck by $15,000 along with the value of the trade by $15,000.
| Purchase Price of New Truck | $300,000.00 |
| Less trade allowance | $135,000.00 |
| Add payout on trade | $135,000.00 |
| Total Amount Payable | $300,000.00 |
| Negative Equity Amount | NIL |
Option Four
Client to sell the truck privately for an amount equal to the payout figure
| Purchase Price of New Truck | $285,000.00 |
| Total Amount Payable | $285,000.00 |
| Negative Equity Amount | NIL |
Why do Financiers Consider Negative Equity a Risk?
The reason that truck finance companies don’t like funding negative equity, is due to the fact that they perceive it increases the financial risk on the transaction. For instance, if for some reason the financier needs to repossess the truck, the likelihood of recouping enough money to payout the loan is significantly reduced. This is because, in the eyes of the finance company, the customer borrowed more than the value of the truck.
Moreover, if a truck is repossessed, the truck will be sent to auction which will yield a lower sale price than if sold at market value. It is for these reasons, that it is very unlikely that a financial institution will fund negative equity on a truck.
Expert Advice to Avoid Negative Equity
The concept of negative equity, can be quite difficult for a customer to understand when negotiating a good deal on the purchase of a new truck. Sales Representatives at truck dealerships are very well experienced in what they do and are always looking to maximise the total profits earned on the transaction. The dealer will seek to make money on the sale of the new truck and the trade in (or on sell) of the truck being traded.
The team at Heavy Vehicle Finance are aware of the games that truck dealers play and can therefore guide the customer in the right direction to make sure they are getting a good deal. Our experience in the area of truck finance means we can advise the client how to mitigate negative equity, ensuring they get the best finance deal possible.
To make contact with a specialist provider of truck and heavy equipment finance, please contact Heavy Vehicle Finance on 1300 788 740. We can make sure that you are able to source suitable truck finance in the event negative equity is evident on your next truck purchase.
