In this article, we will explain how to avoid getting into an upside down car loan. Longer term financing on vehicles means lower monthly payments on a longer term loan. That makes buying a new car seem attractive and affordable. Many new cars are bought on these terms and with little down payment. It seems like a win-win situation for the consumer. So what’s the downside? The combination of a long finance term and low down payment create an upside down car loan.
For the first years, of these long term loans, mostly interest is paid. Light cars and trucks lose value during this same time frame. This combination of factors can mean that more is owed on the vehicle than what it is worth. This fact becomes apparent when the car owner wants to trade it in on a new car. He finds that he really doesn’t have a trade-in at all. Some lenders will offer to bundle what is owed on the trade-in into the loan for the new car. This new car loan is starting out upside down.
A worse scenario is when a vehicle is totaled or stolen. Unless the individual has auto GAP insurance, the insurance company will pay the only book value of the car. Now the individual owes money on a car he doesn’t have. There are some ways to prevent this situation from happening.
GAP insurance will pay the difference between what is owed and the car’s value, if the car is totaled in an accident or stolen. Make a down payment of 20% of the purchase price and pay taxes and fees upfront. Don’t have them included in the financing. Get the shortest term loan affordable. Following these suggestions will insure that if misfortune strikes or at trade-in time, the car’s value will at least be equal to the loan balance. With proper maintenance, the auto’s value should exceed what is left owing.