How to avoid the negative equity debt trap when financing your next car — via drivingdotca ShoppingAdvice finance newcar
The realities of negative equity can quickly sour the excitement of any vehicle purchase. PHOTO BY GETTY IMAGESIf you owe more money on your car or truck than the vehicle is worth, that’s called negative equity. If you’ve not heard of negative equity then you’re not alone, but it’s a problem for many consumers. According to OMVIC, Ontario’s vehicle sales regulator, car dealers regularly report that more than 50 percent of customers with trade-ins have negative equity.
Let’s take an enthusiastic car buyer, Chris, as an example. Chris likes to swap to a new car every three years. He’s now tired of the one he bought three years ago, but has a seven-year loan, with four more years still to pay off. The dealer has assessed the trade-in value at $10,000, but Chris still owes $15,000. That extra $5,000 doesn’t just disappear. Instead, when he finances his next vehicle for another seven years, the outstanding $5,000 from the first car will be added to the new loan.
Hines notes that every consumer’s situation is different. For someone who intends to keep a car until the end of its life then a longer-term loan might make sense. Other buyers use a cash deposit to reduce the monthly payments or make extra payments to shorten the repayment time.Article content
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