Home > Auto Loans >Bad Credit Auto Loans > Bad Credit Auto Loan The Equity (or Lack of It) Does Go Somewhere!
Bad Credit Auto Loan The Equity (or Lack of It) Does Go Somewhere! |
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If you trade in a vehicle that you do not own outright and go for newer cars for lower payments, the equity, or the lack of it, has to go somewhere. It may be that you had equity in your old car with only one year left on a 3-year bad credit auto loan and traded it into a 5-year bad credit auto loan payment. It could also be that you would have leased for 36 months. In any case, if you were indeed upside down on your old car, you have simply financed a new car with your negative equity of the old car by including it in your new loan. A deep analysis will show that you are now in an even greater negative position than before. Experts advise that you should think and act like businessmen do. You should consider whether you need the car and if not, you should sell it even if for $500 or $1000 or more in cash to settle the bad credit auto loan. However, you should consider this: How much is the shortfall between what you owe and what is the value of the car? Say, the value of the car is $8,000 if you sell it yourself and maybe you owe $10,000. This means that you are $2,000 upside down or out of equity. By selling now, you would be out of pocket by $2,000. Now, look at it from another angle: If you do not sell the car now, your monthly expenses would be $295 for the bad credit auto loan plus the cost of insurance, maintenance, fuel and other costs. You can compute the amount of cash that you would be spending over the next six months. If you assume that the insurance is $125 per month and the total maintenance is $150, the total expenditure in the next six months would work out to more than $2,500. If you now consider the realistic value of the car in 6 months you will find that you would be upside down by only $1,000 and would have gained $1,000 in equity. This would prove a bad deal as you would have paid $2,500 for $1,000 worth of equity. The best thing to do would be to sell the car if you do not need it and get out with the minimum loss. This argument holds good if you do not want to replace the car and that is why the cost of gas has not been taken into account. On the other hand, you might have some relative who might be interested to take over the payments and would like to have the car (you should never consider a stranger). The relative might not be able to get credit or come up with a down payment and as such would be willing to pay the bad credit auto loan and insurance payments. You could let them pay the bad credit auto loan off, pay the insurance and then let them keep the car. Do not bother about the equity as you are out of equity in any case. You should, however, check with your insurance agent and maintain the policy making sure that both the bad credit auto loan payment and the insurance premiums are being paid regularly. You can make doubly sure by collecting the money yourself and then paying every month. It is also essential to get the agreement in writing. You should also ensure that the relative does not abuse and lower the value of the car at a rate faster than the bad credit auto loan is getting paid off. This could pose a risk for you but on the asset side, you will have continued credit, you will save $2,000 and you will be helping someone in your family. You should trust the person with whom you are dealing, as this is the same as co-signing a bad credit auto loan. You have to safeguard yourself as your credit will be at stake. |
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