A low- or no-down payment, a longer-term loan and a vehicle that rapidly depreciates in value in the first two years can cause you to be “upside down” in your car loan. The term means you owe more for the car than it’s worth. It’s not unusual for a buyer to be upside down in a car loan a couple of years into a five- or six-year loan.
Consumer experts recommend making a down payment of 20 percent or more and financing for no longer than four years to avoid being upside down. Unfortunately, not everyone can do this.
Here are some alternatives:
- Don’t finance a car for more months than you think you want to own it.
- Make the biggest down payment you can.
- Choose a shorter-term loan if possible.
- Buy a vehicle that will hold its value longer.
If you find that you’re upside down in a loan, experts advise holding onto the car as long as you can — at least until the amount left on the loan matches the car’s trade-in value. If you need to get rid of it, try selling it yourself or consider bundling the negative equity from the car with a loan on a new car. If possible, accelerate your loan payments to avoid being upside down in your new loan.
Another good option to avoid being upside down on your car loan is to invest in guaranteed auto protection (GAP). Most insurance policies only cover the value of your vehicle if it is stolen or totaled in an accident. This type of insurance fills the “gap” between your vehicle’s current value and the amount you still owe.
GAP coverage through Arsenal is often cheaper than at the dealership. You can add this coverage to an auto loan at closing or pay for it all at once at any time during a loan.
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