The Upside down Loan
You’re finally ready to buy the new car but lo and behold! You got a dismal amount of money trading your old car in. This may not come as a complete shock to everyone, especially since the better and higher new car incentives have pulled the prices of used cars. Nevertheless, it is still quite a bind to be in, particularly for those who have old auto loans that have caused them to pay more for the loan than the real value of their car.
The upsurge of upside down loans and its effects
An upside down loan happens when the auto financing you get approved for put too much interest in your loan you end up owing more than the car’s worth. These cases are not unfamiliar to many, but recent reports have seen the increase in the number of consumers in this quandary.
Of course this is not to say that banks and other lending firms should not profit from giving out loans, there are a lot of financial institutions that give their consumers the best deals possible. But we are not talking a few hundred bucks higher than the old car’s value here, negative equity on upside down loans can go as high as $2200.
If you are wondering how this could happen, think about this: low or zero down payment, auto financing with longer terms (more than 6 years), depreciation of car’s value in the first year.
While others make sense of the situation and try their best not to fall into this trap again, others make the mistake of carrying over their debt on the old car into the auto loan they have for the new one.
How not to fall into the trap
If you are smarter individual not wishing to further aggravate your financial agony, you would probably want to keep the car and keep on making the payments. Your best bet is to maintain this until the amount you owe is at least equal to the current value of the car in the market.
Now when you are ready to trade in the car, at hopefully, a higher price than the loan you have on it, you would want to be careful with the auto loans you are getting for the new vehicle you are eying.
So, put in a real down payment. A 5% down payment may seem like an affordable way to get the car you want but remember that it readies you for a bigger debt. As much as possible, put 20% down on the auto loan.
And try not to run after the “super-low” monthly payment plan. These schemes make you pay for your auto financing far too long. Remember that your car would have greatly depreciated in value by the time you finish paying for it. It’s better if you choose a car and a loan that you can really afford. Get the shorter loan terms like 4 or 5 year plans. You will be just about ready to change your car by then.