Being Upside Down
It is very easy to wind up owing more money on your vehicle than it is worth.
The biggest problem contributing to it is the fact that people are taking out longer and longer loans. 72 month loans are increasingly becoming the norm with people putting little to nothing down on their vehicles. It is a way to get the same vehicle with, for example, a $500 loan payment instead of a $600 one.
When you drive that car or truck off the lot, it immediately depreciates. The biggest hit is when you take possession of it and it is no longer technically new but it will continue to depreciate over the first year, as much as 20 percent. It will then continue to depreciate every year, 10 percent on average.
On a 6 year note, it can take many years for the amount that you owe to balance out with the amount that the vehicle is worth. It might take 3 or even 4 years for this to happen.
So, what do you do if you owe more than your vehicle is worth?
Gap Insurance
For starters, you should anticipate this problem from the get go. If you are taking out a long term loan and are not putting at least 20 percent down, you will probably need Gap.
If you were in an accident without Gap insurance, and your car were totaled, the insurance company would pay off what it is worth. The remainder of the balance would be up to you to pay and your lender will come after you for it.
With Gap, the insurance would pay off the value of the vehicle and then Gap would pay the rest.
Gap usually costs between $500 to $1000 depending on the value of the vehicle. If you use it once in your life, you will see the value and would probably never do without it again.
Hint: Like everything else at the dealership, Gap is a profit item. You can negotiate the price that you pay on Gap.
Pay It Down
The best course of action is probably to just continue to pay down the loan until you have either paid it off or until you have some equity in it.
This takes a bit of discipline because people often get an itch for a new vehicle a few years into a loan. The dealership would be more than happy to sell you a new vehicle and add the negative equity to it but this will just compound your problem.
Financing a new vehicle would give you the same depreciation that you originally faced with the added negative equity from your old one. Out of the frying pan and into the fire, so to speak.
If you really have the itch to get a new vehicle, your best option is to make extra payments towards the principal of your current loan.
Refinance Your Loan
Refinancing will do nothing to pay down the debt but you can get a shorter loan term which will help you pay down the loan faster. If you lack the discipline to make extra payments yourself, this may be a good idea.
In addition, shorter loan terms may have lower interest rates, even with only fair credit. The reduction in interest can allow for more of your payment to go towards the actual principle.
Sell To An Individual
If you are reading this, chances are good that if you trade in your vehicle to a dealership you will be behind. They have to make a profit and will therefore offer you less than your vehicle is worth so that they can make money when they sell it.
Selling to an individual instead may allow you to at least break even on the transaction. Of course, selling to an individual presents many additional problems. The biggest issue is the time and hassle of selling a vehicle but there is also safety to consider.
In addition, if you have a lien on a vehicle the sales process will be complicated because there will be three parties involved. Hopefully your lender is local to make this process easier.
Moving Forward
As you probably now, getting behind on a vehicle is almost always a self inflicted problem. Here are some things that you can do moving forward to avoid the issue.
Avoid Long Loan Terms
Long loan terms like 72 months to even 84 months set you up for disaster. In the beginning of the loan term, most of the money that you will be paying will be going towards interest. In the first few years, your vehicle will be depreciating much faster than you are paying it off. Every month added to a loan will hurt you, so look out for little tricks. Often dealers will make add three months to a loan, making it a 75 month loan instead, in order to drop the payment a few dollars.
Long term loans help people buy vehicles that they can probably not afford. If the only way that you can afford a payment is to go to a long term, stop and choose another vehicle.
Put Money Down
You can usually finance just about anything these days with zero down but that does not make it a good deal.
The ideal amount to put down is 20%. That should assure you that you are never behind on your vehicle.
If you can not come up with 20%, try to pay as much down as you can.
Make Sure You Get The Best Deal
All of those little extras at the dealer will just add to your loan note and make you even more upside down.
Obviously, the less that you pay for a vehicle, the better off you will be. Negotiating, however, is not everyones strongpoint.
Be prepared to walk out of the dealer, politely of course. This alone can result in a much better deal the next day or in a few hours even.
Also, watch out for those dealer add ons, they can often be removed.
Finally, watch out for the trim packages you choose. It might be nice to have a fully loaded vehicle but do you need all of the extras? Those expensive options will often depreciate in value the fastest.
