Sometimes financing a car can bring with it complications, and one of these can occur when you find that you owe more than your car is worth. While this is not terribly uncommon in the first year or two of owning your vehicle, after several years, if you’re still in this situation, you may have a problem.
How Do Underwater Auto Loans Happen?
You’re probably wondering how you can find yourself in a position where you owe more than your car is worth. One way is that you agree to a long-term car loan that stretches out longer than 60 months. Because of the amount of interest that is tacked on to this type of loan, the vehicle depreciates in value much faster than you’re able to pay down the actual amount you owe for the car minus the interest.
What Are the Repercussions of Underwater Auto Loans?
There is one major consequence that may arise when you owe more than your car is worth. If you desire to sell your vehicle, you will most likely have to pay the difference between the vehicle’s current value and the amount that you owe. This is done by having you pay the amount at the time you sell or trade in, or it can be incorporated into your next vehicle’s loan payments – definitely not something to look forward to.
Avoiding Underwater Auto Loans
If you don’t want to find yourself in this position, there are a few actions you can take to avoid it:
- Shy away from financing a car. This may be a tall order to consider, but if you have the means, it doesn’t hurt to try paying for your next vehicle in cash. It will give you immediate ownership of the vehicle, and eliminate any future financial responsibility.
- Buy a used vehicle. There are tons of “like-new” used vehicles available at great prices and in good condition that you can consider for a lower price and without compromising preferred style and condition.
- Avoid long-term loans. Another way to avoid this situation is to only agree to buy a vehicle that has a loan term of 60 months or less.
While sometimes it can be hard to avoid having your auto loan go under water, by taking the appropriate precautionary steps when financing a car, you can feel comfortable knowing you probably won’t owe more than your car is worth.