Why Negative Equity Hurts
Negative equity is the amount over a car’s value that a person owes on it. For example, if Joe owes $30,000 on his brand new car, but after driving it off the lot, it’s worth only $24,000, he has acquired $6,000 in negative equity. The more Joe drives his new vehicle, the more it depreciates. Because of this, Joe is going to be difficult for him to ever reduce his negative equity.
Joe may not feel the impact of this negative equity for many years; however, when he eventually goes to trade in the vehicle, he may get a surprise. If his $6,000 negative equity amount remains even, he may try to trade the vehicle in while owing $10,000, only to discover it is worth $4,000. He now must cover some of that negative equity or, (upon the purchase of another car), his negative equity hole will grow well beyond $6,000. Eventually, there will come a day of reckoning, where Joe must cover the whole negative equity amount or be unable to purchase another vehicle.
Why Buying a Used Car Could Help
When you decide to go the used car route, you create much less negative equity at the time of purchase. If you buy it close to its fair value, you may have some negative equity, but you’re still in pretty good shape. The smaller amount of negative equity can be more easily covered with a down payment. Making extra payments on used auto loans is another way to eliminate negative equity.
The Loan Matters
How much interest a consumer pays on their used auto loans makes a huge difference in the amount of negative equity they generate. By choosing a used vehicle, you’ve made a one smart move. Make a second smart move by opting for a used car loan that comes direct to consumers, available from money-saving sources like myautoloan.com.
Used car loans direct to consumer saves you the most money because you deal directly with the lender and there are no hidden fees. When you obtain auto financing through a dealership, the dealer makes profit on the loan by adding percentage points to the interest rate, known as the reserve. In addition, there may be dealer fees tacked on the loan, which you must finance at the higher interest rate. Check out a finance calculator to see for yourself.
Adding hundreds or thousands of dollars to an auto loan balance never helped anyone avoid the negative equity trap. In order to avoid this hassle, obtain used car financing direct from the lender before even setting foot on a car lot. Having preapproved financing in hand before car shopping not only saves you on the financing, it also gives you negotiating leverage. Learn more by checking out one of our handy guides.
Direct to consumer used auto loans can also be used for private party purchases. Purchasing from a private party with direct to consumer used car financing provides one of the best ways to prevent negative equity. By getting both the car and financing much cheaper than possible through a dealer, you create the least amount of negative equity and possibly none at all.
People who decide to work with a direct lender for their used car loan direct save the most money and have the least negative equity. When you avoid the depreciation of a new car and the extra financing charges of the dealership financing, you put yourself in a vastly better financial position. Paying off a negative equity car loan is painful, let’s face it and it can become difficult to do. To keep negative equity minimized, obtain used car financing direct from one of the lenders at myautoloan.com. Having a choice is real empowerment!