12 Awesome (And Quick) Ways To Achieve Negative Equity
Written by Christy Bowman
July 03, 2018 |
Negative equity is a situation you may find yourself in when you owe more on a loan than the item you bought with it is worth.
It's never fun to owe more than you own. When you find yourself owing more in debt than the item you used the debt to buy is worth if you sold it, you owe more than you own. The proper term for that situation is negative equity. A slang term for that situation is being underwater on your debts. And much like literally being underwater, owing more than you own can feel suffocating.
Very often when we at Moneyade talk about debt, we talk about how to get rid of it or avoid it in the first place. But for this article, I decided to look at things you could purchase that would really help propel you into the sickening world of negative equity. By having negative equity on enough of what you own, you can assure yourself a life of perpetual debt. And with any luck at all, by examining this cynical list of awesome ways to achieve negative equity, you'll see some that may be a little too familiar. If so, maybe you'll reflect on changes you can make to your life to eliminate those currently affecting you and avoid those you may encounter in the future.
12. Purchase A Car With An 84 Month Financing Term
Car dealers today seem bent on not disclosing the actual cost of a new car. To hide that number from consumers, cars are now marketed according to their monthly or even bi-weekly payment. To further goose that number, payment terms are extended for 7 years, or 84 months. If you take a $30,000.00 car, and allow a consumer to take advantage of 0% financing over 84 months, the bi-weekly payment will total $178.57. But, to sell that same consumer a $33,000.00 car means they will only need to pay $17.86 more every two weeks. Its like they're giving the car away! In reality however, dealers have convinced consumers that $17.86 is somehow equal to $3,000.00. No matter how you slice it, a $33,000.00 car is $3,000.00 more expensive than a $30,000.00.
11. Rent To Own Furniture
Rent to own is a scam. This scheme is a long term loan under a carefully crafted disguise. Consumers get sold on the monthly or bi-weekly rental amount and lose track of the actual amount of money they will pay for the item during its lifetime. Given the value of a couch will plummet moments after it enters your home, a 5 year payback on it will mean you spend virtually all of it in negative equity.
10. Take Out A Payday Loan
The onerous terms that come with a payday loan mean that no matter what you purchase, it will implicitly fall into the category of negative equity. The moment the ink dries on a payday loan application, you are in the hole to the tune of 20% more than the original loan amount. Not too many assets pick up 20% in value immediately after you purchase them.
9. Use A Loan To Buy Stocks
This is one entry that may not be entirely fair to include on this list. Legitimate securities may not immediately lead to you holding negative equity if your purchase was leveraged by debt. After all, sometimes stocks go up. But sometimes, stocks go down. And if you happen to pick the wrong stock, you could find yourself in a negative equity situation faster than you can snap your fingers.
8. Finance Cryptocurrency With Debt
Investing in cryptocurrency is speculation. You own no underlying asset or equity in anything. If you squint hard enough, you might consider cryptocurrency to have intrinsic value in the amount of electricity that was required to complete the proof of work necessary to add the entry onto the blockchain. But in reality, the entire definition of value in cryptocurrency is the speculation that drives up its price due to the network effects of many other speculators. Odds are good, however, that much like musical chairs, someday the music will end and everyone will be scrambling to dump their holdings.
7. Gamble With Your Credit Card
Talk about achieving negative equity with lightning speed. Implicit in gambling is a lack of any equity. Even if you somehow pay off any debts owe in gambling in a super quick fashion, you cannot possibly pay it off fast enough for the equity of a gamble to exceed its cost.
6. Load Up On Fishing Equipment
Fishing equipment is similar in nature to any personal item on this list. Moments after you purchase it, no one wants to own it after you. People who fish are also fairly superstitious, which can cripple the resale value of any item. By attempting to sell fishing equipment is a signal to potential buyers that it has bad luck.
5. Wedding Dress For A Called-off Wedding
Weddings are a financial disaster. Even modest weddings are enormously expensive. A bride's dress can very quickly exceed $1,000.00. Brides obviously are not intending to purchase a wedding dress as a financial investment. And of all the items you can purchase, a wedding dress may be the #1 most likely to depreciate after you take it home. The coupling of a high purchase price and quick depreciation make a wedding dress a certainty for putting you into negative equity.
4. Mobile Phone
After your messy hands have been all over it, nobody wants to own your mobile phone. Even an iPhone depreciates significantly after it has been owned by someone. Phones also have a ridiculous purchase price, and the reason providers get away with it is because consumers lose sight of the cost when they are buried in monthly payments. If you pay $60 per month on a 3 year mobile phone contract, you might be paying $25 of that amount toward your device. Over the term of the contract, that means you are paying $900.00 for whatever phone you've selected. After about 3 months, you won't be able to give that phone away, but you will continue to pay $825.00 to own it. And considering the value of a used phone is close to $0, it is nearly impossible to not be in negative equity with your mobile phone.
3. Specific Cars: Cadillac CTS
All cars depreciate the moment they are driven off the lot. With financing terms extending almost into forever, that can be bad news for buyers as the longer the payment term, the greater the odds you'll end up in negative equity. With a Cadillac CTS, however, the effect is even more pronounced. According to data from The Street, a Cadillac CTS will depreciate by 51.4% after 3 years. At that point, it will have a value of $27,537.00. That means the original price was $53,573.93. Odds are good that if you financed a Cadillac CTS the payments did not get the debt balance down to $27,537.00 after 3 years.
2. Big Screen TV
The second you put a new TV in your car to bring it home, more than 50% of its value has vanished into thin air. If you purchased the TV either on an installment plan or through your credit card, you may spend the entire life of the TV in negative equity. Televisions typically get replaced every 5 years, so if you spend a large amount of money on a TV - say $2,000 or even more - it may take 5 years to pay it off.
1. Clothes
Not surprisingly, the moment you purchase clothing, its value plummets. Would you want to purchase clothes previously worn by someone else? If you answered yes, you may have problems. However, if you answered yes, if it was cheap you may be a good candidate to check out your local thrift shop. If you are willing to wear previously worn clothes, you can score crazy deals at places like Value Village and Goodwill. If you are shopping for young children, you might be able to retire based on those clothing savings alone.
But if you make large clothing purchases using credit, such as a T-Shirt by Gucci, you may find yourself in negative equity in a hurry.
Summary
Owing more than you own is the wrong side of the equation to be on if you intend to build wealth. These 12 situations that can quickly spiral into a state of negative equity needs to be on your radar. Merchants who hide the true price of the item you are purchasing need to be treated cautiously. Car dealers, mobile phone providers and rent-to-own furniture dealers need to be kept under a microscope. If you have any doubt, always demand to know the full financial obligation you are facing. No matter how far down the path you go, until you actually sign a binding document, you can always walk away. Don't let yourself get suckered into a raw deal where you get left with negative equity for the majority of the time you own the item.
Do you have experience with negative equity? What item did you purchase? How did you deal with being in negative equity?