It’s been said the moment you drive your spanking new car off the lot, it depreciates. And, there’s a sad truth to that statement. A growing number of people find themselves “upside down” on their vehicle loan, which simply means they owe more than the vehicle is worth. Various studies on this growing trend show 38 to 40 percent of new car buyers are currently upside down on their loans. Low down payments combined with longer-term loans are adding to the problem, financial consultants agree.
So what’s a person to do if you find yourself in that situation? If possible, it’s best to just keep the vehicle. The longer you hang on to it, the closer the value of the vehicle is to the amount owed. If you can keep it until the loan is paid off and then save the payments for a few months, you’ll have a good down payment for your next new car.
When financing with TFCU, taking advantage of our Guaranteed Asset Protection (GAP) can protect you if the vehicle is stolen or totaled before you’ve paid it off. If the car is totaled, GAP coverage will pay the difference between what you owe and what the insurance company will pay.
Mark Perleberg, lead automotive expert at NADAguides.com offers these suggestions to avoid the “upside down” scenario:
- Make as much of a down payment as you possibly can. “To safeguard yourself, you’ve got to put 20 percent down,” Perleberg said.
- When financing, choose the highest monthly payment and the shortest financing term that you can afford. Limit auto loan terms to four years or less, if possible.
- Buy a car you like and keep it until it’s paid for. Never finance a car for longer than you think you want to own it.
- Buy a used car. The steepest depreciation occurs in an auto’s first two years, according to Perleberg, “when its wholesale value plummets 30 percent to 40 percent of its original sticker price.”