California Lemon Law and Negative Equity in Your Car
More and more consumers are facing the situation where they have a good claim under the California Lemon Law which they cannot effectively pursue, because they have too much negative equity rolled into the financing.
As 2018 gets under way, lenders are reporting a sharp increase in consumers trading in vehicles where they are “upside down” on the loan. In other words, they owe more than the car is worth. The difference is called “negative equity.” Undisclosed negative equity, i.e., negative equity from a trade-in vehicle that is rolled into the price of the new vehicle, violates state and federal truth in lending laws. Disclosed negative equity becomes a sticking point in lemon law cases. The dispute: manufacturers say “we’re willing to repurchase the vehicle, but we will deduct the negative equity from the final award.” The consumer’s attorney will respond: “the negative equity constitutes part of the price ‘paid or payable’ for the vehicle and should be reimbursed.” Indeed, the State of California Department of Consumer Affairs supports the lemon law lawyer’s view of the matter. The Department wrote an opinion letter to Ford Motor Company’s General Counsel in April 1997 stating specifically that “‘negative equity’ is part of the actual price payable by the buyer.”
The main problem with the negative equity question is that consumers could actually end up owing the manufacturer money at the end of a lemon law buy-back transaction. Here’s how. Let’s say you trade in a late-model vehicle where you have $10,000.00 in negative equity. That $10,000.00 is properly disclosed and re-financed in the purchase of the new vehicle. Let’s also say that you made a down-payment of $2,000.00 and that your monthly payments are $500.00 and that your loan balance is $30,000. Let’s also assume that within the first three months, you brought the vehicle into the shop four times for defects to the engine. The auto-maker agrees to buy your car back. Great you say! But wait. Here’s how the manufacturer does the math: you get back the $2,000.00 plus three monthly payments of $500.00 totaling $1,500.00. That comes to $3,500.00. The auto maker cuts a check to the bank for the $30,000.00 loan balance, but then subtracts $10,000.00 from $3,500.00, leaving a negative balance of $6,500.00. That’s the amount of the check you will be writing to the auto giant who made the lemon vehicle.
Is this fair? The auto makers say “Yes! While we might be responsible for making a lemon car; we’re not responsible for how consumers decide to handle their debt.” As a matter of public policy, however, this effectively lets the auto makers skate on their obligations under the lemon law, because very few consumers can come up with $6,500.00 cash at a moment’s notice. The law is unclear, so the moral of this story is: consider keeping that late-model vehicle a little longer if your only option in trading it in will be to re-finance the negative equity.
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