It’s expensive investing in a car and it only gets much more as time goes on. Over time, the price tag on new cars has increased faster compared to rate of inflation. This isn’t entirely due to greed on the element of automakers; cars may also be more complicated and useful than they used to be. Sure, they certainly were cheaper in the 1960’s, nevertheless they didn’t include air-con, 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 folks are taking to cover off their cars. Few people pay cash; many people take out loans and pay over time. The typical car loan, which was once repaid over an amount of three years, now averages about six years in duration. That’s quite a long time to pay for an automobile, especially if you haven’t any plans to own it for that long.
Taking six years to pay for an automobile has its advantages, as the payments are lower than they’d be over a smaller loan term. This kind of long loan comes with a substantial disadvantage, though – you’ll find yourself in a poor equity, or “upside down”, situation average car length. This could be a serious problem – if you should total the car in an incident, your insurance company is only going to pay you the worth of the car, and not the quantity you still owe.
A consumer is described to be upside down when he or she owes more on an automobile loan than the car is worth. It’s easy to find yourself in a upside situation, and it may occur under any of the following circumstances:
Insufficient down payment – Cars depreciate around 25% the moment you drive them off of the lot. If you haven’t provided enough of an advance payment to cover that depreciation, you may find yourself upside down immediately.
Trading in too often – Buyers prefer 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 cause negative equity. You can often avoid it by keeping along loans to three years or less.
To be able to avoid a possible problem in the case of an incident, you need to contact your insurance provider to make sure that you’ve “gap insurance.” Gap insurance will make sure that you are protected for those who have an incident while in an upside down situation. Without gap insurance, you may find yourself still making car payments even when you no longer have a car. That is the final thing any car owner wants.