All vehicles depreciate. They lose value over time. A vehicle depreciates the most in the first year. And the rate of depreciation begins to slow with time. After one year, a vehicle typically loses 25% of it’s original value. 15% in the second year; and 10% in the third year. At the end of this third year the vehicle has lost a total of 50% of its value. This rate of loss slows with most of the retail value of a vehicle being lost after 10 years.

Most consumers who finance their vehicle have terms in excess of 60 months. In fact 72% of all loans are in excess of 60 months. Some people have 66 month, 72 month, 84 month, even 96 month loans.

The problem arises in the beginning of a loan since the vehicle is losing more money than the consumer is paying off. As a result, a consumer of a new vehicle who attempts to trade in their vehicle in the first 2 or 3 years will typically be told by their sales person that they have “negative equity.” Which means that they owe more on their loan than the value of the vehicle.

To determine whether you have negative equity, call your lender and get a “payoff” from them. You will receive the total amount outstanding on your loan, how long that quote is good for, and the daily amount of interest that accrues to the loan.

For instance, you might be told that you owe $15,000; good until next friday; with $8.32 per diem.

After obtaining your payoff, look up the value of your vehicle online. I would recommend checking at least 3 sources: www.kbb.com, www.edmunds.com, and www.nadaguides.org to find the “average trade in value” of your vehicle. Remember to be accurate with your mileage and condition.

Now compare your payoff to the average trade in value. If you owe $10,000 on your vehicle and it’s only worth $8,000 then you owe $2,000 more than the value of the vehicle; and you have $2,000 in negative equity.