Relief From Upside Down Car Loan - Making Extra Payments And Other Advice
An upside down car loan happens when you took out a longer loan, 6 years,
7 years or longer because the car that you bought is expensive and you cannot afford it. Luxury cars fall into this category. You bought one and because of the high price, you agreed for a longer loan. Sadly, more and more buyers fall into this predicament and there is no end in sight.
Why? Because more buyers are opting for luxury cars with better features. Nice if you have the bucks to pay for those extras.
A look at some current disturbing auto loan facts:
The average length of a car loan today is an astounding 70 months, up from about 62 months a year ago.
On some higher-priced vehicles, nine-year car loans are starting to appear.
None of these figures take into account car buyers who have taken out home equity loans to purchase new automobiles, often extending the payments over as many as 15 years.
With car buyers opting for pricier vehicles, it's fine if they put a big enough down payment, at least 20 percent, to offset the high price. If not, with these kind of loans, they will have problems if their car is involved in an accident or if they are tempted to buy another one. Cars lose half of their value during the first two or three years. If these events happen during this time, they'll be faced with an upside down loan, a car loan in which they owe more money on their current car than it's worth.
An example below is much too common nowadays that it make sense to say this warning: "Never ever have an upside down car loan". But how would you know if you don't have any idea how you get into this situation.
Here's what happens when you take out an expensive auto loan:
You buy a $38,000 car with $4,000 down,
finance it over a common 60-month term, but in two years you decide you want to sell it. Your payoff on the auto loan is $24,000, but your car is only worth $20,000 at this time. This means you are $4,000 upside-down, because in order to pay off your original auto loan, you would need to make up the difference between what your car is worth ($20,000) and what the car loan payoff is ($24,000).
Usually, a new car buyer would simply trade in or sell their old car and use the money they get from that to pay off any remaining car loan balance. In this situation, that's not possible. So the dealer suggests to just refinance the remaining balance from the old car as part of the new auto loan
and to keep payments low, the new loan term is stretched out some more. In effect, you are financing over 100 percent of your car's value.
Sadly, the loans, then, keep getting longer and longer and if the car gets involved in a "total" within the next two or three years, you'll find yourself in a big hole because the insurance company will just settle what your car is worth, not what you owe.
And if the above scenario doesn't happen? With the upside down car loan, you'll be forced to pay interest and make payments on a car you don't even own anymore. And adding the extra debt on your new auto loan puts them upside down all over again.
There's relief for car buyers with good credit because at least, they won't be paying for high interest. But for people with bad credit, they will be slapped with high interest charges for making the wrong decisions. And with another faulty decision to get another expensive car, they confound the first wrong move because the balance will just be rolled over into another high interest loan that keeps getting longer.
Here's a sobering illustration about having an upside down car loan:
Going from a three-year loan to a five-year loan on a $25,000 car can mean as much as $2,000 in added interest. A car that cost $30,000 will actually cost more than $38,000, even for someone with excellent credit. Going with a four-year loan would cut the interest cost by nearly 45 percent.
Avoid upside down car loan by putting at least 20 percent down payment on your new car. price. With that much down, a buyer should begin to see positive equity about two years into a four-year loan, assuming the vehicle's kept in good shape. You should also take advantage of any programs that the manufacturer might be offering, whether that be a low APR or cash rebate offers that help reduce your balance.
If you can't put down 20 percent, scrape up as much cash as you can and keep the term of the loan as short as possible by adding extra on your monthly payments. And if you do it religiously, you might avoid an upside down car loan.
With an upside down car loan, try going for the lowest rate you can get. Try getting your car loan online where the rates are usually lower than what dealerships offer, even lower than what your local banks or credit unions can offer.