Diminished Value and Negative Equity: A Growing Problem

December 27, 2019 by Chris Bibey

As excited as you may be about purchasing a car, there are several financial risks associated with both the buying process and ownership as a whole.

More specifically, diminished value and negative equity could affect you in the future, thus compromising your financial health and making it difficult to stay on the road

Diminished Value Continues to Fly Under the Radar

You don’t think much about diminished value until you’re involved in an accident. It’s at that point you could find out just how much it affects you.

After an accident, there’s a good chance your vehicle will be valued at a lower amount. In the event of a repairable loss, your insurance company is only responsible for the cost to repair the vehicle. They have no legal obligation to compensate you for any loss of vehicle value post-repair.

This is a tough pill to swallow if you were involved in an accident that was not your fault. The same holds true if your vehicle was damaged as a result of:

•    Inclement weather, such as hail
•    Vandalism
•    Hit and run accident

On the plus side, it’s good that your vehicle is repairable. But on the downside, it’s no longer worth as much, which can impact you financially in the event that you want to trade it in or sell it as a private party owner.

Diminished value is a real problem in today’s world, with Carfax and other services making it easy for a potential buyer to review the history of a vehicle, including past damage and repairs.

Negative Equity has Long been a Concern

Most consumers understand that a car is a depreciating asset. But what they don’t understand is that there are mistakes that can magnify this concern.

When buying a car, the salesperson will do whatever it takes for you to drive off the lot. They don’t care about your financial situation, now or in the future. All they want to do is sell the car and earn their commission.

By spreading payments out beyond the car’s depreciation rate, you end up owning a vehicle on which you owe more money than what it’s worth.

In the event of an accident that results in a total loss, your insurance company will only pay on what the car is worth at the time of the accident. They don’t take into consideration what you owe.
The end result: owing money on a vehicle that you can no longer drive.

Take for example a vehicle that’s worth $5,000, but with $10,000 remaining on a loan. If the vehicle is deemed a total loss by your insurance company, they’ll give you a check for $5,000. You can put this toward the $10,000 you owe, but you’re still on the hook for the other $5,000.

Is There a Solution to Diminished Value and Negative Equity?

The best way to prevent trouble with diminished value and/or negative equity is to understand the potential impact, thus allowing you to prepare accordingly. This allows you to make informed decisions in regard to the purchase you make, as well as the type of insurance you carry.

For example, if you’re concerned about diminished value, Optiom Prime’s diminished vehicle value benefit will pay a fixed amount if repairs exceed more then 25% of the declared value of the vehicle at the time of a not at-fault (25% or Less) accident

As for negative equity, there are several ways to protect yourself:

•    Make a substantial down payment when buying your vehicle
•    Don’t sell or trade-in your vehicle until it’s paid off
•    Accelerate the payoff of your loan by paying extra every month

Just the same as diminished value, your insurance company can ease your concerns about negative equity.

With Optiom’s total loss benefit, your benefit will first contribute toward any outstanding amount on your loan or lease.

From there, any remaining amount will go toward a down payment on your replacement vehicle. This helps protect against a situation in which you owe money on a car you can’t drive, thus making it difficult to purchase or lease a new vehicle.

If you’re buying a new car or looking to better protect the one you already have, contact us to learn about your options for purchasing a more comprehensive insurance policy.

FAQ's

What does negative equity mean?

Negative equity means that the value of something in the market is below the value of a loan related to that object or business. Let’s use a car as an example. If your car is valued at $12,000 and you have an auto loan of $14,000 on it, you currently have negative equity of $2,000. It means that the debt associated with the car surpasses its value. It’s the kind of situation that you really don’t want to be in because it can prevent you from being able to sell this vehicle to someone else.

What is diminished value?

Diminished value is related to the value of a vehicle after extensive damage. If you crash your car, potential buyers are less likely to purchase it at the same value it was before the accident, despite high quality repairs. Sometimes, insurance companies pay for diminished value, though they do not do it in all situations, such as if the accident was your fault.

How can I protect myself against negative equity?

The easiest way to not have negative equity associated with your vehicle is to avoid using a loan to buy it and using it as collateral. However, even if it’s not something you can avoid, there are a couple of methods to prevent this issue. For instance, keep your car in a good condition and drive safely, as a crash will likely reduce its value. It’s easier to get into negative equity if the value of the car diminishes very fast, which can happen after a crash.