What Are Upside Down Car Loans?

Upside down car loans are those when the person owes more money on the loan than the car is worth. An upside down is easy to get into because cars depreciate quickly. In many cases, buyers are going to deal with negativity equity, but here are a few things to consider to helping avoid the situation.

Watch the Financing Terms

Financing the loan for 72 to 84 months may make the payments lower, but will definitely cause an upside down car loan situation. Try to finance for 36 to 48 months to pay the vehicle off quicker and ward off depreciation. Also, consider making extra payments toward the principle to help pay the balance down sooner.

Don't Trade

Sell the car on your own, because dealers will not pay you what the car is worth.

Make a Large Down Payment

A larger down payment will reduce the amount of the loan, reducing the chances you'll be caught in an upside down.

Also, keep in mind that there are ways to protect you from upside down loans, namely use GAP insurance. For a fee of around $500, financed into the loan, GAP insurance will pay the difference of your loan in the event the car is ever totaled and the insurance company's settlement is not enough to pay off the loan.

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