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Before You Buy That Car; How Negative Equity Can Impact Your Future Finances

Are you in the market for a new car?  Have you done a budget to determine how much you can afford to pay a month?  Congratulations, you are on your way to making a prudent purchase, but beware of the implications it may have on your wallet.  The lure of purchasing a new car is very exciting.  That new car smell, the feeling of driving a new car with all the new gadgets.  All of these “good feelings” play into the emotional aspect of buying a new car. 

Car dealers use that emotional leverage and upsell customers on various upgrades.  They also appreciate that some people’s finances may be tight and while you may want the sunroof and GPS package, you may not be able to afford it.  But guess what, the finance people have come up with a solution for that…

Over the last decade, car dealers have been promoting car loans with terms of greater than 5 years.  In fact, this may be surprising, but according to market research company J.D. Power, nearly three-quarters or 72% of new car loans in 2016 were for 6 years or longer.  The benefit to you is that your monthly payment is lower, but do you really benefit in the long term?

If we remove the emotional side of the purchase and we look strictly at the financial side, you should also factor the following:

  • Generally speaking, cars decrease in value as soon as you take them off the lot.  If you haven’t put any money down, the value of your car loan is already greater than the value of your new car leaving you with “Negative Equity”.
  • Cars typically require significant maintenance after 5 years when their warranties run out.  If you take out an 8 year car loan, you will likely incur a major expense in addition to having to make your regular car payments.
  • Most people like to get a new car after 5 years however; if you have Negative Equity in your car, you will be left with more debt than the car is worth when you are ready to buy a new car.

The finance people also have a solution to deal with the Negative Equity in your old car.  Subject to your credit, they will approve you for a new car loan to pay off the Negative Equity of the old car loan and include that extra amount into your new car loan which will be amortized for another 6 – 8 year term, beginning the vicious cycle of long term car loans again.

This issue becomes even more pronounced if you have been struggling to pay the balance of your credit cards and/or carry any other debt.  If you are unsure of your options, please call me for a free consultation and I will work with you to help you make the right decision.