A car is an expensive purchase and many of us borrow money to buy one. As the car loan is a fixed amount but the value of the car depreciates, there is a small risk of the loan being for more than the car is worth.
It doesn’t happen often but it does happen.
Having a car loan higher than the value of the car is referred to as negative equity or going upside down.
Being upside down on your car loan
Negative equity is a risk of buying a depreciating asset. Meaning the car loses value while the loan is fixed. This is especially true for new cars as there is an immediate depreciation before it slows down.
All cars depreciate. It’s a fact. Our job is to ensure that depreciation doesn’t impact your financial wellbeing.
If you find yourself upside down on your car loan, the first thing you should do is not worry. Going upside down is only an issue if you plan to sell the car or need to pay off the loan.
While it isn’t the ideal position to find yourself in, as long as you can afford the repayments it makes no difference to the loan itself.
How to avoid negative equity with car loans
The reason going upside down isn’t very common is because it can be avoided. A down payment protects you from going upside down to a degree. A trade-in can do the same.
Overpaying your loan can even the balance over time, as can making a lump sum payment.
If you’re planning to buy a new car, the bigger your down payment or the better your trade-in the more insulation you have against going upside down with the car loan.
Careful car selection can also make a difference. Some makes and model of car depreciate faster than others. If you have a modest down payment or are using a no money down car loan, choosing a car with low depreciation can help avoid negative equity.
Otherwise, you can overpay your loan if the lender agrees and even things out. The other steps mentioned above like lump sum payments and early settlement can also help.
If you’re not in a position to do any of those things, there is still no need to worry. The only time negative equity becomes an issue is when you want to trade up or change your car.
If you can keep your current car until it’s paid off, going upside down isn’t an issue. If you can maintain your car payments until the end, none of this matters.
The risk of going upside down is why we always recommend as large a down payment as you can afford. Not only does it reduce your overall car loan, it is insulation against negative equity.
For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!