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What Is An Upside Down Loan And How Can I Avoid It?

01/29/2019 @ 9:07 am

You have many factors to consider when shopping for a new or used car, which can make the process seem overwhelming. But, with knowledge comes power, and you can avoid the common traps people fall into when securing car loans in Oshawa.

There are several factors which can cause you to become upside down in a car loan. We will explore each one, so you have a good understanding of why they’re a risk, and what you can do about them. Armed with this knowledge, you’ll be able to make wise decisions, no matter your current financial situation.

Upside Down Defined

People use terms all the time without knowing what they really mean. That’s not necessarily a bad thing, but knowledge is power. If you’re wondering what exactly an upside down car loan is, that’s good. Even better, you want to know how to avoid it, because pretty much everyone knows it’s not something desirable.

Sometimes referred to as being “underwater” on a car loan, upside down is when you owe more on a loan than the car is worth. Quite literally, this is a negative equity scenario where if you had to sell the car, it would be necessary for you to pay extra money. People do this all the time with car loans in Oshawa.

Needless to say, this is a bad financial situation to find yourself in. If you get in a car accident, your ride is stolen, or some life event forces you to sell, you’ll need to cover the gap or the amount between what you owe for the loan and how much cash you get for the car.

While it’s one thing to know being upside down in a loan is bad, it’s something else to avoid that position. Fortunately, if you plan ahead and are honest with yourself, you can sidestep negative equity in a car.

Down Payment

Putting money down on a car purchase is a big help.

 

One of the biggest things you can do to avoid becoming upside down in a car loan is to make a down payment up front. While it might be difficult, if you can save up enough to put down 20 percent of the cost of the car, you might never owe more than your ride is worth. Keep in mind the equity in your trade-in plus any cash back incentives for buying the car count for that 20 percent as you try to secure car loans in Oshawa.

Break Out Fees

When you buy a car through a dealership, the fees and taxes are often rolled into the total purchase price. That means you’re financing these costs over the course of the upcoming months and years.

Not only does this increase how much you pay, they automatically mean you’ll be that much more upside down in the loan than if you were to pay the fees and taxes out of pocket.

Extra Payments

Make payments on just the principle of your car loan to dig yourself out faster and avoid being upside down. If for some reason you couldn’t avoid buying a car but didn’t have money saved up for a sizable down payment, all is not lost. You can pay extra each month or every few months to pay off the loan quicker.

Making extra payments can help you avoid being upside down.

Contact your lender to see if you need to specify that extra payments go to the principle only, since policies can vary. By reducing the principal loan amount, you’ll also pay less in interest, so you’ll pay off the car loan sooner. It’s a better way to handle car loans for Oshawa drivers.

Value Retention

All cars lose value after you buy them, but some lose more value than others. The key is to purchase something which will hold onto as much of its original value as possible. This alone won’t necessarily keep you from getting upside down in the loan, but it certainly helps for managing car loans in Oshawa or anywhere else.

Do your homework and learn which cars retain their value better than others. Some cars do better in this area than others, so this knowledge is power. Take this into account for your final decision.

Right Term

As you choose among car loans in the Oshawa market, keep in mind how long you’ll likely own the car. Be brutally honest with yourself, because taking out a loan which lasts longer than you plan on owning the vehicle can result in a difficult upside down scenario.

If you trade in a car you’re still paying off, it’s almost guaranteed you’ll get less than you owe. The difference usually is then rolled into the new car loan, so you’ll be upside down from the very beginning.

This might mean you get a less-expensive car because you honestly plan on keeping it less time. With a shorter loan term, you’ll have it paid off that much sooner, freeing you up to get a new vehicle without the financial burden of owning more than you can get for your old car.

Interest

Another key item when it comes to car loans is interest rate. This figure, if too high, can make the difference between becoming upside down in the loan or not, so pay close attention to it.

Obviously, you want the best or lowest interest rate possible. If you have credit problems or a lack of credit history, this could prove to be a challenge. Still, it’s worth the effort to shop for the lowest interest rate so you’re not having to dig out of negative equity at some point.

Gap Insurance

Many people find they’re not able to completely avoid getting upside down in the cars loans for Oshawa drivers, at least for a little bit, if not longer. By working hard, doing research, and shopping for the best situation, you can minimize negative equity in a car, if not completely eliminate it.

Gap insurance will help if your car is a total loss.

There is the option of paying for gap insurance as a way to reduce any financial risk. If your car is totaled or stolen, this insurance policy will pay off any negative equity. It’s a nice reassurance that no matter what you’re covered.

Refinancing

Consumers who are already upside down in cars loans in Oshawa aren’t without hope. Refinancing can help fix the problem. While not ideal, refinancing can help you negotiate for a lower interest rate, which will help you dig out of negative equity faster. You can also shorten the length of the loan or the term. That likely means a higher monthly payment, but if you can swing the increase you’ll reach positive equity far sooner.

Qualifying for refinancing depends on several factors. Your credit history is a big part of it. Exactly how much you owe for the vehicle versus what it’s worth is also taken into consideration. By shopping around, you can find the best deal on refinancing a loan, helping you to get out of a bad situation.

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