Table of Contents
- Introduction
- What Does Being “Upside Down” Mean?
- Causes of Negative Vehicle Equity
- Solutions to Upside Down Car Loans
Introduction
In Canadian society, owning a vehicle is often considered a necessity. Whether it’s for commuting to work, running errands, or road-tripping across our expansive landscapes, cars play a significant role in our daily lives. However, the financial responsibilities associated with owning a car can be daunting, especially for newcomers, those with credit issues, or recent graduates.
While public transit may be an option, many prefer the convenience that comes with owning a car. Unfortunately, the real cost of a vehicle goes beyond the initial sticker price, and many end up with negative equity in their car loans. If you find yourself in this situation or fear you might be heading there, this article is for you.
What Does Being “Upside Down” On Your Car Loan Mean?
Being “upside down” on your car loan essentially means that you owe more on the loan than the car is currently worth. This situation is also referred to as having negative equity. This can be particularly problematic for those who financed a new vehicle, as cars generally lose about 11% of their value the moment they’re driven off the lot and around 25% by the end of the first year.
When you’re upside down, you’re essentially paying for the car’s initial value, not its current value. This is a precarious position to be in, especially if you find yourself financially strapped or facing unexpected expenses.
Causes of Negative Vehicle Equity
Negative vehicle equity can arise from various factors. An insufficient down payment, high-interest rates, or choosing a longer loan term can all contribute to this problem. For instance, if the car costs $30,000 and depreciates by 11% once you drive off, your down payment should ideally be at least $3,300. Learn more about optimal down payments here.
Additionally, your credit score can significantly influence the interest rate you receive. If you have a low credit score, you might get stuck with a high-interest rate, further escalating your risk of negative equity. Check why knowing your credit score is crucial.
Solutions to Upside Down Car Loans
If you’re already upside down on your loan, don’t panic; there are ways to navigate out of it. One immediate step you can take is to make additional payments whenever possible. This reduces the principal faster, thereby reducing the total interest you would pay over the loan term. Learn more about early payment benefits.
Another option is to trade down your vehicle for a more affordable model. Although it might be a tough decision, trading down can significantly reduce your monthly payments and help you regain financial stability. Find out how to get out of your current car loan.
