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Upside Down Car Loan – How You Can Avoid Having One

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Many car owners in the Big Apple have found themselves upside down—the vehicle they financed is worth less than what they owe. Fortunately, you need not be one of these. If you are about to buy a car, you can avoid getting upside down by doing the following:

 

Pick a car that holds its value well

Some cars hold their value better than others. If you want to avoid being upside down on your loan, you should choose a vehicle that depreciates slowly. How do you find out which cars depreciate at a slower pace? Do some research online and consult all helpful sources available. Check Kelley Blue Book and Edmunds.com, among others. Pay attention to ownership costs attributed to each model.

 

Choose used over new

If you don’t mind missing the new car smell, consider buying a pre-owned vehicle rather than a brand new one. Much of the depreciation was absorbed by the owner before you, so the vehicle is more likely to hold its value better now that it is with you. Moreover, used cars generally cost less. If you borrow less, you are less likely to end up with negative equity.

 

Make a down payment

Speaking of borrowing less, you are urged to offer a down payment. According to Tara Mello of Bankrate.com, the greatest depreciation for a new car occurs on the first year. If you made a down payment, you can counteract the period of time you are upside down.

The ideal down payment is 20 percent of the vehicle’s total cost, inclusive of taxes and other fees. This means you need to save a generous sum of money before you buy. However, if you are lucky, you need not have a hefty sum to make such down payment. Cash-back rebates from the manufacturer and your trade-in are listed under down payment.

 

Make taxes and fees out-of-pocket expenses

Finance only the car. Do not borrow money to pay for taxes and fees. Pay these from your own pocket. If you finance these, you borrow more money and in turn, you will have an upside down loan for longer. Hence, when setting a budget for an auto purchase, do not forget to consider other car-related expenses.

 

Opt for a short loan term

Just because long term auto loans are popular these days does not mean taking one out is a good idea. You are more likely to end up with an upside down loan if you extend the repayment period. Cars depreciate fast, and can thus lose their value faster than you can repay the loan. Hence, sticking with a short term loan is ideal.

Opting for a shorter term will increase your monthly payment, but the expense will be worth it: because most of your payment goes toward the repayment of your loan principal, you can build equity at a quicker rate. This means you are less likely to be in an upside down situation.

It is a wise move to pick a loan that is as long as the period of time you intend to keep the vehicle. If you plan to keep a car for four years, choose a 48-month loan. If you trade in the vehicle before it is paid in full, you will end up in an ‘upside down’ cycle. Why? If your trade-in is yet to be paid off and you are already upside down, you will need to pay the difference in cash or the remaining balance will be rolled into the next loan. The combination of the balance of the original loan and the new car loan guarantees that you will be upside down in your new car.

 

Take good care of the vehicle

Any vehicle can hold its value better with proper upkeep, so make sure you follow your owner’s manual when it comes to regular maintenance. Follow the schedule indicated in the manual. Keep both the inside and the outside of the car clean. At first hint of trouble, do not delay addressing the problem. Have it fixed or fix it yourself if you are able.

Photo credit: Trombone65Flickr/ CC BY-ND 2.0

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