Is Negative Equity Affecting Your Car Loan?

By John Hayden

From fancy entertainment systems and cash incentives to the alluring smell of a new car, automobile manufacturers try a number of tricks to tempt us into buying a new car. But if you are not careful, your decision could leave you in more debt than you can afford. When you buy a car you cannot fully afford, before you know it, you can end up owing more money on your car than it’s worth! This is called negative equity and is currently an issue causing trouble for a lot of people in Canada. Here’s what you should know before buying a new car:

What Is Negative Equity?

Let’s say you have decided to purchase the car of your dreams, and you applied for financing to help with the purchase. Because the car is worth a little more than you can afford, you’ve opted for a long-term loan, i.e., 71 months or longer. This helps to keep monthly payments low. In two years-time, you’ve decided to buy a new car to accommodate your growing family. The problem is, now the car cannot be traded in for more than $15,000, but you still owe $20,000 to the bank. The $5,000 that you still owe the bank is adjusted to the new loan, so you not only have to pay for the new car but the difference as well. This is called Negative Equity.

Reasons For Negative Equity:

1. Buying a Car You Cannot Afford:

Not many people know that cars depreciate by at least 40-50% of their original value within the first four years. The lure of owning a high-tech car with all its bells and whistles can be difficult to resist. This reckless shopping soon catches up, and you end up paying back for a car that’s no longer worth its original value.

2. Zero Down Payment:

When you buy a car you cannot afford, you often end up lowering the down-payment so you can get it off the lot. As a result, you have to compensate by choosing a longer repayment term. That’s probably why a number of finance gurus advise people to stick with a purchase that does not exceed 10% of their annual income.

3. Higher Interest Rates:

Interest rates are inversely proportional to credit scores; the better your credit scores, the less is the interest rate, and vice versa. While there are many new car lenders willing to work with people with bad credit scores, their interest rates can be discouraging.

The Solution:

1. Choose to Purchase Used Cars:

There are many used car dealers in Halifax where you can trade-in your car with a used vehicle and prevent negative equity. Another advantage of choosing used cars is their slow depreciation rates. Since the rates are low, you can buy your dream car at a much lower price.

2. Debt Protection Plan:

Used car dealers in Halifax like Hayden Agencies offer a debt protection plan from WALKAWAY. With this plan, you can return your car to the owner if you are unable to make payments without taking a hit on your credit score. WALKAWAY will take care of the difference between what the car is worth and the amount owed. So when you cannot afford to pay for the loan due to unforeseen circumstances like loss of job, illness, or accident, you are covered.

Get A Free Assessment Of Your Options

If you want to avoid any negative equity pitfalls, or want to get a no-commitment review of your options, I can help. Call me at 902 469-5444 to talk about your needs. Or simply fill out the following form to get started.

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