Upside Down Car Loan
|
Upside down car loans are common in the automobile industry because often people want a new vehicle before their current vehicle is paid off. When a person brings a car into a dealership, he or she is given a trade-in value on the car. When the payoff amount of the vehicle exceeds the trade-in value, the person is referred to as upside down. This is a loan that includes not only the purchase price of the new car, but also the remaining amount of the trade-in vehicle. The problem with an upside down car loan is that the consumer is the loan amount exceeds the value of the vehicle and if a customer must get this type of funding it is advised to pay off the entire amount before making the next vehicle purchase; this will avoid the need for this type of lending in the future. "The horse is prepared against the day of battle: but safety is of the LORD" (Proverbs 21:31). Borrowers should prepare for future expenses and trust God in their borrowing decisions.
To guard against being in the position of needing an upside down car loan, people looking at purchasing a car should put twenty percent down. This way the tax is covered and the consumer has built equity into the vehicle. With banks offering to finance one hundred percent of vehicles, consumers need to exercise discipline to stay within their budget so that when it is time to trade-in the vehicle, they have equity and can avoid borrowing upside down. This lending is often associated with people with bad credit or inferior vehicles, but that is not always the case. Say a person buys a vehicle for 25,000 dollars, but after a couple of months he wants to trade it in. The trade-in value will equal thousands less than the purchase price, and he will need to apply for an upside down car loan to cover not only the price of the new vehicle, but also the payoff of the first vehicle.
This type of lending can often be a bad financial move. Upside down car loans are the kind of debt that is to be avoided if at all possible. The reason for this is that this lending requires people to pay a higher price for a product than the product is worth. Drivers will never get the value back on these loans. The best choice drivers can make if they are in a position where they must use this type of funding in order to purchase a vehicle is to purchase the least expensive vehicle and then commit to paying it off as quickly as possible. The driver can then begin saving for a down payment on the next vehicle so as to avoid upside down car loans in the future.
|
|
|
|
