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| Upside Down Car Loan - Negative Equity Loan | |||||
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The term upside-down generally refers to the situation in which a car buyer owes more on his auto loan than his car is worth. The amount by which the loan balance exceeds the car's value is called negative equity, or negative ownership value. Getting "upside down" happens most often with long-term loans in which little or no down payment was made at the beginning of the loan, or in cases where a previous car loan was "rolled over" into a new loan for a new car. The situation in which one is upside-down on a car loan is also called a "negative equity" situation. It means that the buyer has no ownership equity in the vehicle and, in fact, has a negative ownership balance. To close the loan would require paying additional money on top of the amount already paid. Attempting to sell or trade a car with an upside down loan is always troublesome. Upside-down loans can result from paying too much for a new vehicle, paying little or no down payment, having a very long loan term (72 months or more), having a high interest rate (possibly as result of bad credit), buying a high-depreciation car make/model, or rolling over a balance from a previous car loan that was also upside down. Some or all of these factors can help contribute to negative equity. It's also common for many car loans to be upside down simply because monthly payments during the first months of a loan, which are largely finance charges, often do not keep pace with a car's rate of depreciation. A car can easily lose value faster than it's loan is paid off. The best way to get out of an upside down car loan with negative equity is to simply keep the vehicle until enough payments have been made that the remaining loan amount is less than the resale or trade value of the car — until some positive ownership equity has been built up. Otherwise, getting out of an upside down loan by selling will require cash to offset the negative equity amount. But what about trading? Can I trade if I owe more than my car is worth? What happens to the negative equity? Does it go away? The short answer is, yes, you may be able to trade but, no, a negative balance doesn't go away. The negative equity is simply added to the cost of the new car. Dealers often tell customers that an outstanding loan balance on a trade-in vehicle is "no problem" and that he will "pay off your old loan." However, if the customer is upside down on his old loan, the dealer indeed pays off the old loan but then adds the negative loan balance into a new vehicle loan — and might not mention what he has done. This small omission of explanation causes more customer lawsuits against dealers than any other reason. Customers are often astounded to find their new car is costing them more than they thought. Trading for a cheaper car often results in even higher monthly payments than before. There is nothing illegal about adding the balance from an upside down loan into a new loan. However, many people don't understand how it works and become upset when they learn. Rolling over negative loan balance into another vehicle loan, even a less expensive vehicle, will likely result in a worse upside-down loan situation and higher payments. The cheaper vehicle turns out not to be cheaper after all. One way to get out of being upside down is to lease your next car. That's right. Trade your old vehicle with the upside down loan for a new vehicle lease. Payments are lower than a loan, even with your negative equity added to the new lease. This only works if, and only if, you can complete the lease as scheduled. If you end the lease early, you can end up with an even worse upside down situation. In cases of large negative equity, loan companies may not allow the entire amount to be financed without a significant cash down payment to offset the deficiency. Sometimes dealers will get creative and find a way to hide the negative equity so that they can get their customer's new loan or lease approved. The dealer will give the customer a higher price for his trade-in and add the same amount to the price of the new car. This makes it appear to the loan company or bank that there is less negative equity, although the overall deal is the same to the customer. Upside-down loans are potential problems if the financed vehicle is stolen or destroyed in an accident. The problem can occur because insurance only pays current market value of a totaled or stolen vehicle, not the entire amount still owed on the loan. Contrary to some thinking, loan companies do not "write off" loans for destroyed or stolen vehicles. After insurance, a car owner must pay the remainder of his loan in cash to close the loan. This could easily amount to thousands of dollars and can be financially devastating. Gap insurance is the solution to this possibility. Gap insurance covers the remaining loan balance after insurance has been paid. It can be purchased from auto insurance companies for a nominal fee. Here is a company we recommend: GapInsuranceQuotes.com. If you are having trouble making your car payments with an upside down loan, see our article. "Can't Afford Your Car Payments?" for more helpful information.
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