Upside Down Car Loan

Turned Upside Down

Depreciation causes your car to become worth less and less as time goes on, says Jack Nerad, editor of "Driving Today". Eventually, your car is worth less in the market than what you still owe on it. "That's not a problem unless you go to trade in that car," Nerad says.

Trading In Your Car

It's a problem Mike Morris knows well. He loves his new car, but when he looks at his monthly car payment, he gets a stomachache. "When I sit down and make my car payment, what goes through my mind first is ouch because it's expensive," says Morris.

Mike's car payment wouldn't have been quite as expensive if he hadn't been upside down with his old car's loan. When he traded in his old car, he still owed $12,000 dollars on it, but the dealer only offered him $7,500. "So I ended up with $4,500 in negative equity," he says.

When Mike makes his car payments for his new car, he is also paying off that $4,500 he still owes the dealer.

Why You're Upside Down

Nerad says there are two factors that have brought on the rise of upside down loans.

First, "Vehicles are getting more expensive... a lot of vehicles now are well over $30 thousand," he says. The more expensive the car, the longer your loan term is likely to be, and, "The longer the term in general, the more likely you are to be upside down," Nerad says.

Another factor? Nerad says many manufacturers are offering incentives to spur new car sales. Although you may be getting away with a good deal on a new car, for your used car, it's a different story.

"What that has done is depressed the value of used cars, and of course, you are driving a used car," Nerad points out. If the price of your used car is depressed, you're probably not going to get as much for you car as you owe. You'll end up paying for that later on.

Nerad explains what you can do when buying your next car to make sure you're not upside down.

Put the Brakes on Trading In Early

"The biggest tip that I can offer consumers so they won't end up upside down is keep the car for the full term of the loan," Nerad says.

Don't enter into a car loan for five or six years, if you know you'll want a new car in just two or three years, he adds.

Lengthening Your Loan

You may opt for a longer loan in order to get smaller monthly payments. Nerad says you shouldn't chase those low payments if you'll want a new car before the term of the loan is up.

"If you lengthen the loan term from 5 to 6 years while you're sitting in the dealer's chair, it doesn't seem like that big of a deal," Nerad says.

But when you trade that car in after just a few years, "It can really cost you a lot of money," Nerad says.

Low Down Payments

Promises of low down payments drove Mike right to the dealership, "I wanted to put the least amount down as possible. Hopefully, zero down," he says.

"Dealers and financial institutions these days are offering very low down payment loans," Nerad says. He points out that you can get a car sometimes without putting anything down.

That can be a great deal for many people, but that means you owe that much more on the car over the course of your loan. If you trade your car in before the loan matures, you have a greater chance of not getting a good price for your trade in.

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from Fox11 Eyewitness News Online

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