You enrolled in the right car loan program and now have a good chance of getting an awesome vehicle. Unfortunately, you have had some issues with paying back your loan on time, and now you are looking at negative equity, meaning your car is worth less than what you owe on it. But don’t panic. We will help you handle this situation efficiently.
Negative equity is the difference between your car’s market value and the amount you owe on it. If the value of your car is lower than the amount remaining on your loan, you are at a point of negative equity. In other words, you owe more than the current value of your car. So you need to pay off that debt every month before paying for everything else. This situation may feel like a dead-end, but there are ways to navigate and even avoid it entirely.
Here are 5 strategic tips for Calgary car loan borrowers with negative equity.
To lessen the likelihood of falling into negative equity, a strong start is advisable — make a larger down payment. By doing so, you straightaway reduce the amount you need to borrow, and your loan balance could be lower than the vehicle’s depreciating value. Aiming for a down payment of at least 20% is a healthy practice.
While spreading the loan repayment over a longer term means lower monthly installments, it could also lead to a situation where you owe more on your loan than your car is worth. Cars depreciate rapidly, and you could be caught in a negative equity trap. Picking shorter loan terms can help you avoid this dilemma.
An often-overlooked aspect is the maintenance of your vehicle. Cars in a good state generally retain their value for longer periods. Adhering to a proper maintenance schedule not only extends your vehicle’s lifespan but also slows its depreciation rate.
Refinancing your car loans in Calgary can be another effective way to take the sting out of negative equity. If you can secure a better interest rate or a shorter repayment duration, refinance might be a good idea. This allows you to reduce your loan balance quicker, keeping pace with your car’s depreciation.
Trading in your vehicle for a new one when you are already in a negative equity position might seem like a solution, but it could make matters worse. Adding the outstanding debt from your previous loan into your new car loan draws you deeper into debt, raising the likelihood of being stuck in a cycle of negative equity. Make it a point to close the old chapter (loan) before starting a new one.
Managing negative equity doesn’t have to be an uphill battle. These steps offer you a smart and proactive way to handle car loans and steer clear of the negative equity pitfall. Always remember that the way to conquer financial challenges is by gaining knowledge and formulating a strong strategy.
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