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Upside-Down Car Loan

Being upside-down on a car loan means that in the course of your auto loan you have ended up owing more money to you car financing lender than your car is worth. This is a very unpleasant financial situation.

But how does it happen?

To illustrate better how you can get upside-down on your car loan, consider the following example:

You have bought a new vehicle for $25,000 by paying $2,000 for the down payment and getting a 60-month car loan. However, you have decided to sell you car two years after you bought it. You still owe about $17,000 in order to pay off your auto loan but you car's value have already depreciated and now it is worth only about $15,000. This means that you are $2,000 upside-down.

How did you let this happen? Well, combine a low down payment with a long-term car loan for financing a new car purchase and there you go - you have an upside-down car loan.

Being upside-down is not at all uncommon nowadays. In fact, the sad statistics is that about 40 percent of consumers are upside down.

How to Avoid Being Upside Down on a Car Loan

The following tips will help you avoid upside down car loans.

First, make sure you make a big down payment.

Nowadays buyers often skimp on their car down payment. This is one of the reasons for the increasing number of upside down car loans. You should try to put down around 20% in order to avoid getting into such a situation.

Don't choose too long-term car loans just to lower your monthly payments significantly.

In order to avoid getting upside down on the car loan you should choose the highest monthly payment you can afford with the shortest financing term.

Try to keep your car as long as possible.

Face it, cars depreciate. However, the biggest depreciation is during the fist one-two years when cars generally lose about 30-40% of their value. In order to avoid getting an upside-down car loan, buy a car that you like and keep it for a longer time. Additionally, don't finance a car for longer than you think you want to own it.

Buy a used car.

Basically, new cars have already started losing value from the minute you drive them off the lot. Used cars have already depreciated so if you buy a used car you let its first owner deal with that big depreciation during the first years.

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