Over the past decade, trucks and SUV’s have out sold cars; but with gas prices over $4.00 per gallon the value of these vehicles has plummeted.  So what are your options?

The first challenge is determining how much negative equity you may have.  Negative equity occurs when you owe more on a loan than the value of the vehicle.  For example, if you owe $20,000 on your vehicle but it is only worth $15,000, you would have $5,000 in negative equity.  Meaning that if you sold your vehicle for the market value you would still have a deficiency balance outstanding.

The amount of negative equity is usually in proportion to the percentage of the loan left to pay.  It generally takes about one-half of the loan term to get to a position where you are even with the balance on your loan. So it would take 2 1/2 years on a 5 year loan.  That general statement, however, depends on a vehicle depreciating in a normal fashion. And these are not normal times. 

Values of used SUV’s and Trucks are dropping at a significant rate.  Recent studies have reflected a drop in value during on quarter of the year equivalent with an entire year’s depreciation.  That means that a vehicle would drop a year’s worth of value in just 3 months.  It’s a free fall to the “new” market value - or perceived value of these vehicles.

So your first step is to call your finance company and get your payoff.  Then look up the “average trade in value” on www.kbb.com for an approximate market value and compare that to your payoff.

Here’s the kicker … you are responsible for any negative equity. Period.

If you have negative equity it can only be dealt with by using cash to pay for it, adding it to your next loan (paying for it plus interest), or waiting until you pay down your current loan (again paying for it).

Many consumers think that the dealer will somehow absorb some or all of your negative equity. Not true. Don’t be deceived, confused, or even hopeful.  It’s just simple math and the negative equity is your baggage that you bring to the party.

So the first option of dealing with your SUV is to pay for any negative equity (by cash, rebate, or adding it to your next loan) and getting out of the vehicle.   If your credit is good, when you add $1,000 in negative equity to a loan, it will typically raise the new loan $20 a month.  If your credit is challenged, it will typically raise the new payment $25 a month. [Using general assumptions of loan terms and interest rates].

A second option is keeping your SUV and recognizing that now may not be the best time to sell it.  If you are cash strapped or your negative equity is very high (e.g. $10,000 or more) then keeping the vehicle is generally the smarter thing to do.  You would not be able to make up that amount of money in gas savings - even with a Prius.

A third option for some people who have heavy commutes and need their SUV’s for family and lifestyle - is considering getting a commuter vehicle.  Consider buying or leasing something that is small and fuel efficient for your commute.  The cost of that vehicle may be less than the gas on the SUV.   And it will allow you the freedom to get into a new vehicle without digesting the negative equity on the SUV. 

The bottom line, there is a bubble out there that affects more Americans than the housing market and it’s called the “SUV Bubble.”  Each consumer (or Leasing Company) that owns a Truck or SUV will have to pay for the drop in value of their vehicle.  The only decisions each of us has to make is which exit to take: sell now, hold, or add a second vehicle.