Owning a car has become one of the biggest necessities of today. Now, more than ever, people are willing to travel larger distances to get to work. Many factors contribute to that, but the bottom line is we are more open to that idea, instead of relying on public transportation. Often, we are facing financial problems when thinking of buying a car. Our financial status determines whether we can buy a new or a used car and whether to apply for a auto loan or not. Most of us are faced with the reality that we’ll have to apply for a credit loan.
In many cases, people get over their heads with these loans and get caught up in a situation where they end up with an upside down loans. We wanted to dig a bit deeper into this particular case and explain what this loan means, what causes it, and what are the solutions.
What is an Upside Down Loan?
As you may have figured out, an upside down auto loan is the most common case of upside down loans. This type of loan is created when the balance owed is larger than the collateral. For example, you decide to buy a car for $10,000 and you secure collateral of the same amount. As the market fluctuates often, the price value of the car might go down and end up being lower than your collateral. That way, you end up offering collateral of $10,000 over a car that is worth $8,000.
Here are some of the reasons that contribute to the upside down loan, as well as one solution that is often overlooked. Let’s check them out.
Minimum Down Payment
Low down payments are a big relief for many people who are searching to buy a car. While this may sound comforting, low down payments also equal higher outstanding amounts. So, even though it seems nice, low down payments might cause an upside down loan for your car.
Interest rates are the biggest killers when it comes to getting an auto loan. If you’ve taken a loan that has a high-interest rate, it may be difficult to keep up with the monthly payments since they are more than likely to be high. These may lead to missed payments, which may cause an upside down auto loan.
The Car Is Costly
All of us want to drive the best cars on the market. For example, the new Mercedes E Class is a dream-come-true for many petrolheads. Unfortunately, the best cars on the market are often too expensive. Similar to getting a loan with high-interest loans, costly cars can be very tough to pay off. The inability to keep up with the monthly payments on an expensive car will cause an upside down loan.
Refinancing Might Be A Solution
Of course, the best solution is to find a way to pay off your debt, but in some cases, the interest rates may be too big. That is the time when you should discuss available options with your lender or find the total negative equity of the car.
One of the most acceptable solutions is refinancing. This type of loan allows you to battle the interest rates and end up balancing your monthly payments according to your budget. Of course, a good credit score is required.
Overall, lenders have become much more complicated to deal with, especially the 2008 financial crisis. Nevertheless, make sure you do good research before applying for an auto loan, or any type of loan for that matter.