Upside Down Car Loan
- August 12, 2020
- Posted by: alakra
- Category: Finance & Accounting
The recent economic upheaval left many Canadian with large amounts of debt and other financial problems. One such problem is the upside-down car loan. You have likely heard about the many houses that homeowners have walked away from once they owed more than the home’s value.
Similarly, car owners are finding themselves perplexed when the amount they owe on a car surpasses it’s current value. Are you in this position? How does an upside-down car loan happen?
An upside-down car loan, also known as a negative equity car loan, is a loan where you owe more for your car than it is worth. You can get yourself into such a situation in a number of ways:
One of the most common problems when buyers with credit less than perfect are looking for a vehicle that suits their lifestyle and to keep for a long time, and the
dealer wants to sell them a vehicle that is going to make them the most profit, not a vehicle that’s going to suit the customer’s needs. They try to put you in a different vehicle that suits them and tell you to just drive it for few months to build better credit and come back and trade it in, at a very high-interest rate and all the profit they made, not to forget the add-ons the pushed into your payments. So now, your vehicle is worth half of what you paid for and you haven’t left the dealership.
If you trade in a car that has a loan balance and add that balance onto your new auto loan, you will owe more for the new car than it is worth.
If you purchase a car with no money down, the car will depreciate much faster, leaving you with a negative equity. Remember, cars depreciate in value as much as 20 to 50 percent in the first year of ownership if you bought your car with no money down, and you were dealing with a shady sale person, you are likely to owe way more on your loan.
Even with a decent amount of money down, if you opt for an extremely long-term loan to keep your car payments low, your negative equity is not likely to improve.
If you are in an accident and lack sufficient insurance coverage to fully cover any damage to your vehicle, your car will decrease in value drastically while your loan payment stays the same. This is why comprehensive, collision and uninsured/underinsured motorist coverage is so important and is usually required by lenders.
No matter how you got into your upside-down car loan, the most important thing is to rectify it as quickly as possible! Call us!