Like thousands of consumers, Ivonne Reyes was upside down in the loan on her relatively new car.
Reyes was stuck in a vehicle that was worth less than she owed. She had a Mercedes-Benz SL500 that she wanted to trade because it had "major problems."
But before she could get upright again, Reyes, a sales representative for KTCK-AM, had to put $22,000 down on a leased Ford Explorer and pay $1,200 a month for two years.
"It was hard, but everything turned out fine," said Reyes, 39, who bought a new Thunderbird last year and is free of debt from previous cars.
Reyes' experience may be an extreme example of what the auto industry calls "negative equity." But it is hardly the exception.
Five or 10 years ago, about one-fourth of the typical new car buyers in the Dallas area were upside down in the vehicles they traded in, dealers say. Today that number may exceed 75 percent, they say.
"It is an industry problem," said Don Herring, chairman of the New Car Dealers Association of Metropolitan Dallas and president of Don Herring Mitsubishi in Dallas and Don Herring Mitsubishi in Plano, Texas.
Prestige Ford in Garland, Texas, the largest single new car dealership in the area, compared the value of about 100 vehicles taken as trades in the previous 10 days with the debt owed on them. It found that 85 percent of the vehicles in the trades were upside down, and their negative equity amounted to an average of about $3,800 per vehicle.
"I was kind of shocked," said Jerry Reynolds, managing partner of Prestige Ford. "I would have guessed that the average trade was upside down by about $2,000."
Longer-term loans and a soft used-car market are mostly to blame for the growth of negative equity, dealers said. The typical new car loan now is for 60 months, which means consumers probably will have to make payments for at least 40 months before they will have any equity in their vehicles.
Moreover, the frenzy of new vehicle buying last fall, ignited by zero percent financing, created a glut of trade-ins that pushed used car values down. A year ago, most cars were depreciating at a rate of about 12 percent a year. In January, the rate was running close to 19 percent, said Paul Taylor, chief economist of the National Automobile Dealers Association.
"You figure you will spend X amount of money on a car and keep it for three or four years, and it sounds like a reasonable plan," Herring said. "Then a new model comes along and catches your eye and you trade in two years. Sometimes, that's how this starts."
"It's a very, very competitive business," noted Ray Huffines, owner of Ray Huffines Chevrolet, Huffines Chrysler-Jeep-Hyundai and Huffines Dodge, all in Plano. "Credit is easy to get. And people have a desire to own new cars."
In the past couple of years, automakers and some banks have begun offering 120 percent loans that permit consumers with good credit to "stack" debt from their trade-ins onto their new vehicle loans.
"We expect it every time a customer walks in the door," Reynolds said of the growing amount of negative equity. "We've seen people borrow against their 401(k)s to get out of an upside-down deal."
Reyes said she got that way over the course of a couple of cars. She traded her Mercedes-Benz SL500, an $80,000 car new, for a Mercedes S430 sedan, a demo that cost less than $70,000.
She says she didn't pay much attention to the total amount she financed, focusing instead on the monthly payment, as many car consumers do. The payment on the second car was about $1,500 a month, which was $300 to $400 higher than on the first car.
"That was fine," Reyes said. "I had a brand new car, and it was perfect."
But after a year or so, she said, she became uneasy about the amount she would ultimately pay for the Mercedes. The car was on a five-year balloon. After making five years of payments, for a total of $90,000, she would owe another $30,000 or so.
"From my job, I knew a lot of car dealers, and I started showing my contract to every one I knew, asking if they knew of some way I could get out of it," Reyes said. "I was going to end up paying over $100,000 for that car."
Reynolds came up with what he acknowledged was a radical solution. The problem was that the Mercedes had a wholesale or trade-in value of about $33,000 and Reyes owed $74,000 on it, a $41,000 gap.
The solution was a lease on a Ford Explorer sport-utility vehicle, onto which the $41,000 in debt was stacked. After the $22,000 down payment and two years of $1,200-a-month payments, Reyes sill would not have any equity, but all of the upside-down debt would be retired.
When she turned in the Explorer last summer, she picked up the new Thunderbird.
"I plan to keep this car for a while," Reyes said.
Negative equity is a problem on the other end of the economic spectrum, too, but the approach to dealing with it is the same.
Reynolds said he has been "counseling" a family with a 1998 Escort since June 2000. When the family first contacted Reynolds, they owed about $9,500 on a car that was worth $3,500.
He said he has told them to put a little extra cash each month with their regular car payment and wait for the used car market to strengthen.
"Sometimes, you just have to wait," Reynolds said.
Taylor of NADA thinks the high number of upside-down consumers might be a short-term problem. "If I believed that it would be a continual problem, then it would be an issue of some concern," he said.
Used car prices should begin firming up in the next quarter or two, and that should improve trade-in values, he said.
Taylor recently took a sample of some of the most popular used vehicles, all of them 1999 models, and compared their values in January 2001 with values in January of this year.
He found that the vehicles had depreciated an average of 18.8 percent in a year. Before 2000, the average depreciation rate "was in single digits," Taylor said.
"My expectation is depreciation peaks this quarter at 20 percent and could be down in the 15 percent range by the end of the year," he said.