Avoiding The Upside Down Car Loan Trap

Do you find yourself stuck in an upside down car loan?  It’s not a nice feeling to be stuck in a car you may no longer like because the car is now worth less than the price you paid for it, is it?  Sure, you could trade it  in for a newer model and roll over the balance into a new loan, but that will only server to get you deeper in debt.  Upside down car loans suck to be sure, but the situation is easily avoided with just a little forethought.

Avoiding The Upside Down Car Loan Trap

You might say car dealers love upside down car loans.  Why?  Because how else are they going to convince a deeply-indebted suc- ahem driver to pony up for a car they can’t really afford?  The salesman makes a commission even if the car is eventually repossessed and besides, most car-loving Americans will go to great lengths to keep their beloved car, even eating nothing but ramen for weeks at a time.  But you’re smarter than that, right?  The upside down car loan is not your friend.  Here’s how to avoid it.

• Put At Least 30% Down – A new car typically depreciates 20% as soon as you drive it off the lot.  Think about that.  If you buy a car with a 20% down-payment, you are dangerously close to being underwater on the loan the minute you drive off the dealership parking lot.  That 20% down-payment isn’t sounding so hefty now, is it?  30% really is a bare minimum if you want to avoid an upside down car loan, but even that may be pushing it.
• Get A 3 Year Loan – If you can’t afford a 3-year loan and a 30% down-payment, you can’t afford a new car.  Period.  Loans as long as 5 years (and occasionally 7 years!) are becoming increasingly common.  Don’t fall for it.  A 5 year amortization schedule generally won’t keep you ahead of depreciation for the first few years of the loan.
• Perform Routine Maintenance – Remember the owners manual that came with your car?  It’s not a door-stop.  Your manufacturer lists out a detailed maintenance schedule for you to follow in the manual, and you would be well advised to follow it to the letter since performing recommended maintenance will help boost the value of your car, especially after the manufacturer’s warranty expires.
• Better Yet, Just Pay Cash – Paying cash is obviously the best option.  It’s worth the sacrifice, trust me.