Unfortunately, cars depreciate in value. Other than real estate, few things in life gain in value over time. In North America, millions of car owners every year discover that depreciation the hard way. They find out they have negative equity, or are “upside down”, in their car loan. Are you unfamiliar with the term? It’s pretty simple, actually. Negative equity means that your car is worth less than you owe on your car loan. Does that make your jaw drop? Don’t be so surprised – it could be the case for you too.
How Does a Car Have Negative Equity?It can happen in different ways, and one of them could very well strike home with you. You might:
- Try to trade in your car shortly after buying it. We all know cars depreciate the most in their first year or two. If you buy a car and decide you need to change it up soon after, that depreciation could mean you’re thousands of dollars upside down in your loan.
- You might choose a zero down payment loan. It’s not a bad thing in itself to buy a car with zero down payment, but it puts you at risk of negative equity in the short term. The price you pay for the car is immediately lower when you drive it off the lot, so you’ll owe more than it’s worth.
- You added insurance, protection packages or accessories to your car loan. It’s great to personalize and protect your car, but it doesn’t increase its value for the loan. If something happens, you’ll owe more on your car loan than the car is worth.
What You Can Do About Negative EquityFirst and foremost, you want to avoid getting deeper in the hole. If you find out that your car is worth less than your car loan, you might just want to hang onto it for a while longer. Trading in your car when you have negative equity essentially doubles up the problem on the next car loan. That’s not ideal. It’s best to avoid negative equity in the first place. Three great ideas are these:
- Keep your loan term as short as you can manage. Just because an 84-month loan is available doesn’t mean it’s a good idea. Keep your car loan at 60 months or less for the best results.
- Put as much down payment on your car loan as you can. If you put money down, it eats up that gap between your car’s value the loan amount. If something happens and you need a different vehicle, you’ll be in a much better place.
- Deal with a dealership that actually cares about the financial aspects in your life, not just about selling cars. If they just try to sell you the most expensive car you can afford, even though you aren’t interested, it’s a clue you’re dealing at the wrong store.