Alexander tells us how to avoid negative equity on a car loan as a guest blogger for Different Truths.
If you have negative equity on your car loan, it will continue to grow until you pay it off. Here is how to avoid negative equity on a car loan to save money and stress in the future.
What is Negative Equity?
Negative equity is when you owe more than your car is worth. For example, if you owe $15,000 and your car is only worth $12,000, you are in negative equity by $3,000.
Negative equity can happen for several reasons. There was some kind of accident or damage done, or the market crashed, and now everyone wants to sell their cars before they lose even more money. Or they just got sick of driving around in an old clunker with no air conditioning. Whatever the case, it’s best not to get into this position if you can avoid it.
Ways to Avoid Negative Equity
You must ensure you get the best deal possible to prevent getting stuck in negative equity. Here are some tips.
Make a Larger Down Payment
The larger the down payment, the less likely it is that you will end up with “negative equity.” Car dealerships earn more interest when they finance a sizable portion of your car loan. Putting more money on your vehicle purchase can significantly boost your ability to avoid negative equity and save on interest.
Buy Car You Can Pay Upfront
If you want to avoid negative equity on your car loan, buy a car you can pay for upfront. If you use a lease or finance option instead, the depreciation of a vehicle will make it difficult to recoup your investment when it comes time to renew or upgrade.
Pay Off Your Current Auto Loan
Before you can get another auto loan, you will have to pay off your current one. It is the best way to avoid negative equity on a car loan. The problem with this is that it can get costly. You are better off looking for an auto loan from another lender instead of trying to pay off an old one so you can tackle a new one.
Choose Shorter Loan Terms
Shorten your financing term to reduce the negative equity you will have at the end of the loan period. For example, if you are financing for four years instead of five, your vehicle will be worth more when you sell it, and you might even be able to buy another car without taking out additional loans.
Research a Car’s Value
Ensure you research how much money you are paying and how much others pay for the same or similar car models. That way, you can negotiate with poor credit car dealers based on an apples-to-apples comparison rather than just paying off what you owe.
Final Thoughts
The best way to avoid negative equity is to ensure you have enough money for a down payment. If you can’t afford one, consider buying a less expensive car or leasing it instead of financing it through a loan.
Picture design by Anumita Roy
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Very helpful, thank you!