![]() For most car owners, having to deal with a negative equity vehicle is like being stuck between a rock and a hard place. So what do you do when you find yourself underwater on your auto loan? Sadly, there’s no one-size-fits-all fix for this sticky financial circumstance. How You Can Get Out of a Negative Equity Auto Loan Perform a careful assessment of your finances to ensure that you can afford to pay off a bigger loan before you make this decision. Doing your homework is a must if you’re planning to combine two auto loans into one. However, you may find yourself facing a mountain of debt which keeps on growing. Combining a Previous Auto Loan with Your Current One: Rolling an existing auto loan into a new one might seem like a good short-term solution to lightening your financial burden.Poor credit can also result in a higher interest rate. While having a longer loan term can seem attractive because of the prospect of lower monthly payments, however, you’ll be paying a lot more as a whole because of higher interest payments. Having a High Interest Rate or a Loan Term that is Too Long: New vehicles are now purchased every 3–4 years while the average term of auto loans is now more than 6 years, according to a report from the Financial Consumer Agency of Canada.As you’re financing the whole value of the car, you make a loss as soon as your new car’s tires first hit the pavement (because of depreciation). You Avoided a Down Payment: Another major reason why people end up with a negative equity is because they avoided putting down a down payment when they purchased the car.A good rule of thumb is to buy a car whose payments don’t exceed 10% of your total paycheck. They end up ticking all the expensive gadgets in the options list which take the final price of the car way beyond what they can afford to pay off. Buying a Car You Can’t Afford: Quite a lot of people, especially first time car buyers, get carried away in the moment when buying a new car. ![]() Common Reasons of Having a Negative Equityįrom purchasing a vehicle they can’t afford to getting stuck with a double-digit interest rate, here are some of the most common reasons why people end up with a negative equity on their vehicle: If you sell a car for less than what you owe, you’ll end up having to pay the difference to close out your loan. But, negative equity can potentially pose a problem if you plan to sell or trade-in the car. However, negative equity isn’t much of an issue if you plan on keeping the vehicle long term.Īs you continue to make payments on your auto loan, the amount you owe will eventually level out with the market worth of your car. As a result, car owners often end up with a negative equity. Cars also depreciate like a stone these days, especially brand new ones. How Negative Equity WorksĪs purchasing an automobile is a large investment, most people secure an auto loan so they can pay off the amount in increments, rather than a lump sum. Over the course of this blog, we’ll tell you all you need to know about negative equity and how you can get yourself out of this sticky financial situation. Negative equity can also affect you’re your ability to sell off your vehicle or trade it in for a new one. This sticky situation is also referred to as being “upside down” on your car loan. For instance, if the remaining payments on your auto loan amount to $20,000 and your vehicle’s market value is $15,000, you have a negative equity of $5,000. Negative equity occurs when the value of the vehicle falls below the amount you owe on your current auto loan. Negative Equity On An Auto Loan: All You Need To Know
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