What is " Negative Equity"?

Simply put, negative equity is the difference between the dollar amount the dealer allowed for your trade-in, vs. the actual amount owed (figured in terms of a negative number).

So, let’s assume you trade-in a vehicle, and the dealer “allows” you $5,000.00 for it. Then the dealer checks your loan payoff, and it’s $9,000.00. The difference, or “negative equity” is ($-4,000.00)

What happens to the negative equity when you trade-in your present car, and take delivery on the new one?

In this scenario, you are “upside down” (you owe more on the car that it’s worth). The dealer will “bury” (carry over) the negative equity into the new vehicle transaction, and hence the loan if paying by monthly installment contract.

So, if you purchased a $21,000.00 vehicle, you add $4,000.00 of “negative equity” to the sales price equation, and you end up with a much higher car payment.

What does this have to do with the California Lemon Law? Plenty. When a consumer initiates and completes a lemon law claim, the “negative equity” (negative loan balance carry-over) is a deduction to their lemon law refund. In the case of a replacement vehicle in lieu of repurchase, then negative equity is not of issue.

You can quickly see how not doing a lemon law claim, and simply trading off your vehicle can cause massive negative equity carry-over (a very bad thing). By pursuing a lemon law claim, even though the negative equity is deducted, the vehicle is repurchased, any loan is paid off, and typically the consumer has a considerable cash refund due to he/she by the automobile manufacturer. In almost all cases, using the lemon law far outweighs the economic downfall of trading in the vehicle.

An experienced lemon law attorney in California can best assist you in doing an “actual damages” worksheet on what your specific lemon law situation may afford to you if successful with the automobile manufacturer.
 

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