Don’t Get Caught with Negative Equity on Your Trade In
With about 10 years in the car business, I can say that most people owe more money on their auto loans than the car is worth. More than what the car is worth to a dealer, and usually more than a car is worth to a private party buyer.
How does this happen?
There are several reasons people are more upside down in their car loans today than ever. Here are a few:
- Not putting enough money down.
Everyone likes buying cars without down payments, but few realize what the long term consequences are. Most states have sales tax. Everyone should know that the second you drive a new car off the lot it becomes a used car and is worth a lot less. There is also the spread between retail and wholesale values. Retailers charge retail, and pay wholesale or less.
- Long term loans.
Auto Loans used to be 18-24 months, then as cars got more expensive auto loans got longer to compensate. Now it is fairly normal to see 72 month and even 84 month auto loans. The way loans work, you are always going to be paying more money towards the priciple balance of the loan at the end of the loan, and more money goes towards interest in the beginning of the auto loan.
- Trading out too soon.
Sure, some people buy a car without knowing that in a year or 2 that vehicle will not work for their family. Either having more kids, or commuting more because of a job change, or something else. But most people just like buying new cars. On average, people purchase a new vehicle every 2.5 years. With a 6 year loan, and little down payment, you will always be in a negative equity situation if you keep doing this.
How to Beat Negative Equity
If you are in an auto loan now, start making payments greater than your minimum payment. Make sure you let the bank know that you want the additional money to go towards the principle balance or they may apply it to your next payment instead.
For the love of God, put some money down when you buy a car. Negotiate your best deal, then put a down payment on the loan.
Shorten the term as much as possible. Sure, it is nice to have a $300 car payment, everyone wants a $300 car payment. However, not everyone likes the negative equity you get when you have a really long term loan.
Keep your car longer. Personally, I drive them until the wheels fall off. If your vehicle meets the needs of your family, and it is reliable and safe, there is no rush. Save up some down payment, and owe less money when you drive off the lot.
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Tags: auto, auto loan, auto loans, car, car loan, Car Loans, car payment, cars, Down Payment, loan, loans, money, Negative Equity, new cars, tax, trade in your car, trade-in, Upside Down