In a hole with an upside-down auto
Got a car you want to trade in?
Get ready for a shock.
Not even rock-bottom discount financing or a hefty
cash rebate on a new car can make up for the low-ball offer a dealer
is likely to make on your trade-in.
Blame it on reverse sticker shock.
"The high new-car incentives have caused
used-car prices to go down," says Tom Kontos, a vice president
at ADESA Corp., an auto auction and remarketing services company.
"They're going to get an unexpectedly low price on the trade-in."
Getting socked with a low price on a trade-in is especially
bad news for the 40 percent of new-car shoppers who are upside down
on their old auto loans.
Upside-down loans on the up
"Upside down" means owing more on a car than it's
worth. When a dealer knocks down the value of your used car even
further, the financial hole you're in gets that much deeper.
"There has always been cases of consumers being
upside down, but it's been growing increasingly worse over the past
five years," says Bob Kurilko, vice president of product development
and marketing at Edmunds.com.
"It's an alarming statistic that 40 percent of
consumers are upside down."
And it's not as if today's car shoppers owe a few
hundred dollars more on their old cars than they're worth. The average
negative equity is $2,200.
"It's about as high as it's been,"
How could this happen? It's easy. Just combine a
low down payment or no down payment with an auto loan with a longer
term -- say five, six, even seven years. Toss in the rapid depreciation
that hits every new car in the first couple of years and presto,
you're upside down on your auto loan. Try to trade in your car and
you'll find yourself awash in negative equity.
Some folks make matters worse by rolling the old
car's remaining debt into a new loan. They're forced to pay interest
and make payments on a car they don't even own anymore. And tacking
the extra debt on their new auto loan puts them upside down all
"Once you get on that merry-go-round, you're
on that merry-go-round and it's tough to get off," says Jack
Nerad, author of "The Complete Idiot's Guide to Buying or Leasing
The best advice for someone who is upside down on
an auto loan? Hang on to the car and keep on making payments.
"Keep the car they have, that's probably their
best financial bet," Nerad says.
You'll want to stick out the old loan until it's paid
for or, at the very least, until the amount you owe is roughly equal
to the car's market value.
If you really need to unload the car, you might want
to try selling
the car yourself. You could pocket an extra $1,000 to $2,000,
depending on the type of car, its age and how well it's been maintained.
Happy with your car but having second thoughts about
the long-term loan that you took on last year? Consider refinancing
the loan to a lower rate and term.
Avoiding the upside-down hole
Want to avoid the hassle of getting caught upside down on your
next auto loan? Follow these tips:
Don't skimp on the down payment.
These days, the average down payment
for an auto loan isn't much of a payment at all. A typical car buyer
puts just 5 percent down. That isn't going to get the job done.
"You've got to factor in that cars depreciate,"
says Mark Perleberg, lead automotive expert at NADAguides.com.
"To safeguard yourself you've got to put 20 percent down."
Take a pass on the super-low
monthly payment. Lots of new car buyers dig themselves
into a financial hole by chasing a low monthly payment.
"Consumers are very driven by payment,"
Kurilko says. "If they can get a lower payment by stretching
out the loan, they do it."
Don't fall into this trap. Choose the highest monthly
payment and shortest financing term that you can afford. Limit auto
loan terms to four years or less whenever possible.
Buy a car you like and keep it.
Being upside down on an auto loan can be big problem if you
decide to exit a loan early. So choose a car that fits your driving
needs and hang on to it. Never finance a car for more months than
you think you want to own it.
Buy a used car. Want to
knock down the balance of your next auto loan in a hurry? Buy a
It all has to do with a vehicle's depreciation, or
decline in value. The steepest depreciation occurs in an auto's
first two years, when its wholesale value plummets 30 percent to
40 percent of its original sticker price. So it's not long before
the value of a new $21,000 car drops by $6,000 to $8,000.
By buying used, you let a car's first driver deal
with that big depreciation nosedive. You get the car you want without
the financial strain or the hassle of being several thousand dollars
upside down on your loan.
For tips on landing a good deal on a used car,
check out this