What is Upside Down Car Loan?
All of us prefer to use cars to travel from one place to another as this is the most convenient mode of transport for short and medium distances. A majority of people purchase cars by taking a car loan so as to spread the payments over a period of time. Though this seems to be a smart thing to do initially, it can sometimes result in a problem in the long run.
How To Get Out Of An Upside Down Car Loan?
An upside down car loan occurs when some time after the car has been purchased, the customer who is making regular payments has an amount of loan outstanding that would not be covered even if the car was sold. This is also referred to as a negative equity car loan and should be avoided under any circumstances. A common example is that if a car is purchased for $15,000 and the customer pays monthly for about 2 years; he is left with a loan of $12,000. However, the value of the car, if sold, is only $10,000. This implies that the customer is at a loss of about $2,000, without including the interest he or she has already paid to the bank.
Upside down Car Loan Options and Tips
The only solution is to sell the car and pay off the loan at the earliest. Under normal circumstances, the owner would still have some money short and may need to take a loan to cover it.
- This appears to be a decision that would result in a loss, but is better than holding on to the car as it will continue to depreciate and the loss will keep on increasing.
- Care should be taken to ascertain the exact value of the car on the basis of make, model, and year of manufacture, mileage and overall condition. Also try to sell to individuals as they tend to pay more as compared to dealers. Now, purchase a car that is less expensive to own and you will feel much better.
- However, prevention is better than cure and plan carefully so that you do not end up in such a situation. When you have decided to purchase a car, look at the options available prior to taking a loan.
Always make as high a down payment as possible as it reduces the total amount of car loan thereby giving you the choice of either reducing the tenure or the monthly installment of the loan. This will help you plan your finances in a better way and also eliminate any chances of an upside down car loan. Always keep in mind that the sooner you pay off the money, the better it is for you.