Avoid Being Upside Down In Your Bad Credit Auto Loan |
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If you have taken a
bad credit auto loan on a very low- or no-down payment or if you have taken a long term bad credit auto loan for a vehicle that is fast depreciating in its value in the first two years, you are surely heading for an "upside down" in your above loan. This signifies that you owe more than the worth of the car. It is quite common for buyers to fall in such a situation a couple of years into their five- or six-year loan. This situation, also known as a negative equity situation, can be caused by paying too much for a new vehicle, buying a high-depreciation make/model, or rolling over a balance from a previous car loan that was also upside down. Thus you will find that whereas you still owe $5,000, the trade-in value of your car is only $3,000 and it has been found that nearly 38% of those who trade in their old cars for buying new ones owe more on their trade-ins than what they are worth. If your car is depreciating faster than the equity that you are building, your bad credit auto loan will most likely go upside down. You might think that prolonging the term of your bad credit auto loan to five years or more would bring down the monthly payments amount but then this payment would hardly cover the interest on the purchase price. A monthly payments calculator can show you how increasing the loan term and reducing monthly payments , and vice versa, can affect the cost of a car loan. The recommendations of consumer experts to avoid being upside down are that the down payment should be 20% or more and the financing should not be for more than four years. As everyone cannot do this, given below are some alternatives: - You should finance a car for the period that you plan to own it and not more - Try to make the largest down payment that you possibly can - Get a shorter term loan if possible - Buy a vehicle that will not depreciate very fast and will hold its value for a longer period Experts advise that you should hold on to your vehicle as long as you can or until the time that the amount left on the loan matches the vehicle's trade-in value, if you become upside down in a bad credit auto loan. When you want to sell your car, you should try to do so yourself or think of bundling the negative equity from the car with a bad credit auto loan on a new vehicle. The best way to avoid being upside down in your new loan is to accelerate your loan payments. In an upside down situation, you should hold on to your car and pay off the loan as soon as possible. You could also refinance with a new bad credit auto loan or a home equity loan, which might be at a lower interest rate. If you keep your monthly payments the same when you refinance at a lower interest rate, you will be able to pay down the principal at a faster pace. Ideally, you should accelerate things by shortening the term of the loan and increasing your monthly payments. Refinancing could pose problems as your negative equity might be rolled into the bad credit auto loan for a new vehicle and this will make you lose the negotiating power in determining both the price of the vehicle and the interest rate. To get out, you can call the lender and determine what payoff would be 30 days hence and then advertise in the paper for that amount or for more. The best thing, however, is to pay an extra amount on the bad credit auto loan every month. Your current lender might also agree to extend the term of your existing bad credit auto loan as they may realize that it is better to restructure the loan than have it become a non-performing loan. |
