Do You Know Your Car Is Carrying More Negative Equity Than It’s Worth?
Buying a new car can make for exciting times, but not if you fail to do your research before making the purchase. If you take out a loan to get the car of your dreams, you have to be aware that the value of the new car is going to depreciate as soon as you take it off the lot. That means that you can end up owing the bank more than what your car is worth. This is called negative equity, and for new car owners, it can cause a huge headache.
Here are three ways you can end up with negative equity on your car, and two ways to get out of it:
The Car Costs More Than You Have
This one should be obvious to understand, but for many buyers, their eyes are bigger than their pockets are deep. They see the new car they have been dreaming of sitting in the lot and they go for it, expecting that they can make use of loans to enjoy the vehicle. More often than not, this catches up with them much quicker than they would have expected, and they are left paying the bank back for a car which has lost its value very quickly. Most experts recommend you should not buy a car if it exceeds ten percent of your gross annual income. So before diving into the lot to get that sports car you have long been dreaming of, make sure it matches up with your finances.
No Down Payment
When buyers are really desperate to get the car they want but lack the funds on the spot, they often opt to cut the down payment out of the deal. This is a prime example of short term gratification that does not pay out in the long run. The result of making a deal like this is that the monthly payments are much larger, as they have to compensate the absence of the down payment. And when a car leaves the lot just for the first time, it can lose twenty percent of its value, meaning that owners are then left paying monthly premiums that no longer match up with the value of the car. Because insurance companies really only pay out what the car is worth, if you get into an accident after leaving the lot, they are going to pay you up to twenty percent less than what you paid for only minutes ago. So be smart!
High Interest Rate
Interest rates are often dependent on a person’s credit score. If you have bad credit then you can end up paying big for it. Because of what we know about how new cars depreciate, owners with high interest rates are, in a way, being punished two times over: first on the interest rate, and second on negative equity. Before buying a car, consider whether or not the dealership is willing to help people with bad credit. Hayden Auto Agency often does this for its customers.
Buying a used car is the surest way to avoid getting into negative equity, because unlike new cars, their value does not depreciate the same way. The car has been used for a while and its value has more or less plateaued, making it safer for purchasing. Likewise the monthly payments on a used car are likely to be less than what you would get for a new one.
Use Walkaway Insurance
Walkaway insurance is a great way to protect buyers from taking on negative equity with their car purchases. With this insurance, buyers have the option of returning the car to the dealer should something come up in their life that makes making the car payments unfeasible. Walkaway covers the difference between what the car is worth and what the loaner is owed, ensuring a safer purchase for car owners.
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