Buying A Car Can Turn You Upside Down

Buying A Car Can Turn You Upside Down

It's expensive buying a​ car and it​ only gets more so as​ time goes on. Over time, the price of​ new cars has increased faster than the rate of​ inflation. This isn't entirely due to​ greed on the part of​ automakers; cars are also more complicated and useful than they used to​ be. Sure, they were cheaper in​ the 1960's, but they didn't include air conditioning, air bags and video systems. Convenience and safety comes at​ a​ price.

With the increase in​ price comes an​ increase in​ the length of​ time people are taking to​ pay off their cars. Few people pay cash; most people take out loans and pay over time. The average car loan, which used to​ be repaid over a​ period of​ three years, now averages about six years in​ duration. That's a​ long time to​ pay for a​ car, especially if​ you have no plans to​ own it​ for that long.

Taking six years to​ pay for a​ car has its advantages, as​ the payments are lower than they would be over a​ shorter loan term. Such a​ long loan does have a​ significant disadvantage, though - you can find yourself in​ a​ negative equity, or​ "upside down", situation. This can be a​ serious problem - if​ you should total the car in​ an​ accident, your insurance company will only pay you the value of​ the car, and not the amount you still owe.

A buyer is​ described as​ being upside down when he or​ she owes more on a​ car loan than the car is​ worth. It's easy to​ find yourself in​ an​ upside situation, and it​ can occur under any of​ the following circumstances:

Insufficient down payment - Cars depreciate as​ much as​ 25% the minute you drive them off of​ the lot. if​ you haven't provided enough of​ a​ down payment to​ cover that depreciation, you may find yourself upside down immediately.

Trading in​ too often - Buyers like to​ trade cars in​ and roll their outstanding balance into a​ new loan. These unpaid debts can contribute to​ negative equity.

Too long a​ loan - Five and six year loans often lead to​ negative equity. You can often avoid it​ by keeping the length of​ loans to​ three years or​ less.

In order to​ avoid a​ potential problem in​ the event of​ an​ accident, you should contact your insurance provider to​ make sure that you have "gap insurance." Gap insurance will make sure that you are protected should you have an​ accident while in​ an​ upside down situation. Without gap insurance, you may find yourself still making car payments even though you no longer have a​ car. That is​ the last thing any car owner wants.

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