How to avoid the negative equity debt trap when financing your next car via drivingdotca ShoppingAdvice finance newcar
The realities of negative equity can quickly sour the excitement of any vehicle purchase. PHOTO BY GETTY IMAGESIf you owe more money on your car or truck than the vehicle is worth, that’s called negative equity. If you’ve not heard of negative equity then you’re not alone, but it’s a problem for many consumers. According to OMVIC, Ontario’s vehicle sales regulator, car dealers regularly report that more than 50 percent of customers with trade-ins have negative equity.
Financing a car over a longer period reduces the monthly repayment amount to a more affordable level, putting higher-priced vehicles within the reach of more buyers. However, seven or more years is a significant length of time for a product that begins depreciating the second it’s driven off the lot. Many vehicles depreciate quickly, particularly if they are driven more than average distances, for example when commuting. As a result, long finance terms are not without risk.
“It’s important to understand the risks that are involved in car financing,” says Tim Hines, Director of Consumer Support at OMVIC. “When you’re purchasing a car, don’t just pay attention to the monthly payments, but also to the term of the loan and the overall price of the car. Perhaps you need to purchase a less expensive car in order to get something that fits into your monthly budget, rather than financing the more expensive one for longer.
Whatever your situation, it’s important to educate yourself and make the right decision because the consequences can be severe if you don’t. In the worst-case scenario, if the vehicle needs a big repair that you can’t afford and is rendered unroadworthy – and therefore worth nothing as a trade-in – you’ll be left with no car and a pile of outstanding debt. Repossession could follow.
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