Securing Financing is the Second Most Important Step in Car Buying
When buying a car, the last thing you need hanging over your transaction is negative equity in your
current
used car. Often called an "upside down loan," negative equity means that
a loan balance exists on the current car. There's no loan fairy and the remainder of the car loan
doesn't disappear, even if the dealer says, "I'll pay off that loan for you." The loan amount on
the
used car is consolidated into the loan on the
new car --
creating a mega loan.
"So what?" you might think, "I'll just get a larger loan on the new car." Well, there's more
bad news if you're upside down and you should consider the following scenario. What happens
if you total your
new car shortly after purchasing it? The insurance company
is only going to pay a percentage of your remaining
new car loan and you still
haven't paid off the first car. Now you're stuck paying on two
used cars
and you will have to finance a third car.
Why Does Negative Equity Affect So Many New Car Buyers?
The minute you drive your new car out of the dealer showroom, your new car becomes a used car,
losing as much as 25 percent of its original value. Unless you have put down a hefty down
payment, you're instantly upside down. Your loan principal drops at a much slower rate than
your
new car depreciates.
How Do I Determine My New Car Loan Amount if I Have Negative Equity?
Next, take a trip out to
RoadLoans.com where you can see what impact your negative
equity will have on
buying a new car. From the Resources menu at the top,
select Payment Calculators. Use these calculators to determine how much that
new
car is really going to cost you when you roll the old car loan into the new one.
Add what you owe on your
used car to the amount you want to finance on your
new car to arrive at the total dollar amount you want to finance.
Do Car Dealers Benefit From My Negative Equity?
Not only will auto dealers attempt to sell you financing, but they'll also probably try to
sell you a higher interest rate. And, there's more:
Dealers can now sell you
gap insurance to insure the difference between what you owe on the entire loan and the totaled
value of the new car. This insurance ranges between $500 and $700 at the dealership
and it's an additional profit center with a handsome profit margin for the dealer. Worse,
it's one more expense for you to bear when you
buy a car.
4 Steps to Shrewd Car Buying
Do you really have to have that new car right now, today? If not, pay off the
used
car loan first. Resolve from this day forward to buy a
new car the
right way. Follow this four-step game plan to help ensure that you never find yourself in an
upside down position again:
- Pay off your car in full before buying a car.
- Buy a car to fit your budget.
- Make the largest down payment possible on a new car.
- Pay off your car in the shortest possible time. This might mean larger loan payments,
but it might also mean a reduction in interest rate.
Make yourself right side up and you gain another advantage over car dealers when you want to
buy a new car.
