With the current economic crisis we are hearing more and more about financial issues that didn’t really affect us before. One financial term that is showing up both in the news and in our private lives is being upside down in a loan. This has become very common in the housing industry as more and more people are finding they can’t sell their homes because they owe more than they are worth. Being upside down means exactly that, the value of the item the loan is held on is less than the loan amount. This means, in order to sell the item the owner would need to come up with extra cash to pay off the loan above the amount that he or she will receive from the sale.
Being upside down on car loans is not really that uncommon at all, it is just that we never had to worry about liquidating newer cars before. The fact is, as soon as a new auto is driven around the block from a dealership it has lost several thousand dollars in value. This is because the car is now a used car and no longer new. In fact, for the first year or two that you own a car you are driving something that you could not sell to pay off the loan amount. When we used to buy a car and drive it for three or four years this didn’t really matter, but now people are losing their jobs and trying to sell their cars only to find that they owe more than it is worth.
When you are looking for car credit at the time of purchase it is important to ask about this phenomenon. If you are willing to keep the car while the loan value and the car value come into alignment then this really isn’t an issue. But, if there is a chance you may need to resell the car then look very carefully at the how the values will change over the next one to two years.
The only way to get around this problem is to pay a large enough down payment that you are only making a loan on an amount that is equal to or less than the expected value for this car in the used market.