The Car Payment Mistake That Locks You Into Years of Financial Stress
Buying a new car and planning on financing it? You might want to make sure you aren’t hitting a few bumps along the way. Many drivers find themselves trapped in years of financial turmoil when they make a big mistake upon purchasing their vehicle.
That mistake is getting “flipped,” according to Gretchen Seidel, an automotive consultant at Seidel & Co. That is, when you owe more on your car than it’s actually worth.
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Upside-Down Value
In the automotive industry, “being upside down” or "flipped” is a huge driver of financial strain on a customer's budget, in Seidel’s professional opinion. Seidel pointed to data from Edmunds, which recently reported that almost 31% of trade-ins are carrying negative equity, with an average of $7,183.
“Look at the additional $7,000 added to a $40,000 loan on a depreciating ‘asset’ that may lose $5,000 in value the minute you drive off the lot,” Seidel said. “Basically, you’ve created a $12,000 hole on day one. It’s hard to budget your way out of that, especially when it adds an average of $100 a month to a payment.”
Added Interest
Beyond just the worth of the vehicle, Seidel noted that drivers sometimes do not consider the additional interest being paid on that "underwater" amount.
“Over the life of a 72- or 84-month loan, the additional $7,000 adds a significant amount of interest,” Seidel said. “When you sign a retail installment contract to pay for a car you don't even own anymore, that debt follows you into the next car, and the one after that."
Make Sure To Math the Math
“At the end of the day, if you have to roll over a balance to make it work, you're just financing a mistake,” Seidel said when it comes to compounding your car payment woes. “Instead of doing that, stop for a minute, look at your finances and what you really need from transportation to make a better decision for your budget."
If possible, try to refinance your auto loan in order to cut costs without changing your vehicle in the process. Refinancing can lower your rate, reduce your monthly payments or shorten the term of your loan. Plus, this option does not require you to give anything up in your day-to-day life. Even a small rate reduction in the amount you pay can mean more money in your pocket and less debt in your car.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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