The Upside Downs of Car Finance – What You Need to Know

Car Finance – What You Need to Know

Many people have been in a situation where they go into a dealership looking to buy, still owing money on their current vehicle, wanting to trade up for a better ride. Car finance options can be tricky in this case. As the old saying goes, their eyes are bigger than their stomachs – or more appropriately, their eyes are bigger than their wallets. Anyone with loan experience will call this being upside down in a loan. This is when a consumer owes more money on their current vehicle than it is worth. For instance, a person goes in to trade a car with high mileage and a lot of wear and tear for a new car that will serve them better. The current one is well worn, and its worth or value has deteriorated. However, the money owed is greater than the value given by Kelly Blue Book or the amount the dealership is willing to give for trade toward the new vehicle. This money then has to be rolled over into a new loan, adding to the purchase price of the new car.

In 2013, according to Responsiblelending.org, 23% of buyers requiring car finance were upside down or owed more than their car’s value. The average amount of what is called negative equity was around $3800. The easiest way to avoid this common pitfall is to keep your vehicle until the loan is paid off in full, and then trade for something you can afford. Most consumers make this mistake when they become impatient and want a more dependable, sharper ride and don’t want to wait until the old ride is paid off. This impatience can put them in a financial bind, causing even more frustration and stress when they have to pay more for a loan for the old car and the new one. The purchase they were so excited to make becomes a heavy financial burden. So, patience will pay off in dividends for those who wait out the loan.

Another way to avoid being upside down with car finance is to avoid stretching the time for which the car is financed. Banks offer, typically for new cars, a six-year loan. There are very few autos on the market that will withstand six years of use and come out being worth a decent trade. But if a buyer shops around and gets a very reliable model from a manufacturer who is known for high trade in values, and gets terms for less than five years, the trade in value will be substantially greater. There will be no headaches when turning in for a better situation.

Patience, research on models that are available, and a little knowledge of how car finance works can result in a rewarding buying experience. As most people treat their bodies well to serve them better and for more years to come, so, too should cars be treated – pay them off on time, maintain them well and keep good records, and buy a brand that’s trusted to ensure a good trade in value to avoid owing more than your ride is worth.