All too often, people come to us because they’re caught in negative equity with an existing car loan. Just imagine: the new car you bought just a few years ago has depreciated so quickly, that its trade-in value has fallen lower than the amount of the loan you took out to buy it. In other words, even if you sell the car, you’ll still be left owing money. This is one of the reasons we recommend against taking out long term loans, and encourage you to make as large a down payment as possible on a new car. The biggest problem is that most car owners don’t find out until it's time to refinance and buy a different car. By this time, the problem already exists and you’re faced with a dilemma. What should you do if you find yourself in this situation?
- First, if you have the means, you can pay the difference out of your pocket. This is the simplest way to make the problem go away, leaving you free to look at another car.
- Another option is to increase your monthly repayments, so that the loan is paid off earlier. This works, providing your existing loan doesn’t have any early repayment penalties in the contract. If it doesn’t, you can pay more and catch up with the problem, so that it does not get any worse. You’ll then be free to sell the car without worrying about an ongoing debt for a vehicle you no longer have.
- The final option is to roll the negative equity into a new finance deal. Many dealers will allow you to do this, but it can come with some problems. The biggest is that you may find yourself in negative equity once again, only this time it will happen even quicker. So if you're looking at this option, it’s important to consider the amount of money you still owe. It’s only a safe option if the amount is fairly modest.
When you decide to refinance and trade in the car, we recommend making a down payment of at least 10% on the next vehicle. If you can afford more, even better, as this way you’re better protected from falling into negative equity again. This may mean you have to change your choice of car to fit in with your revised budget. At RCK Financial Services, we offer a range of tailored finance, insurance and warranty solutions, finding you the best deals, lowest interest rates and a greater chance of being approved for a loan that will help you to buy a car, problem-free.