It’s expensive investing in a car and it only gets more so as time goes on. As time passes, the price tag on new cars has increased faster than the rate of inflation. This isn’t entirely as a result of greed on the section of automakers; cars are also more complicated and useful than they used to be. Sure, they were cheaper in the 1960’s, however they didn’t include air-con, air bags and video systems. Convenience and safety comes at a price.
With the upsurge in price comes an increase in the length of time folks are taking to pay for off their cars. Few people pay cash; many people sign up for loans and pay over time. The common car loan, which was previously repaid over a period of three years, now averages about six years in duration. That’s a long time to pay for a vehicle, particularly if you don’t have any plans to own it for that long.
Taking six years to pay for a vehicle has its advantages, whilst the payments are below they’d be over a shorter loan term. This kind of long loan comes with a substantial disadvantage, though – you can find yourself in an adverse equity, or “ugly”, situation length of car. This can be quite a serious problem – if you should total the vehicle in an accident, your insurance company will only pay you the worthiness of the vehicle, and not the quantity you still owe.
A customer is described as being ugly when he or she owes more on a vehicle loan than the vehicle is worth. It’s no problem finding yourself in an upside situation, and it may occur under the following circumstances:
Insufficient down payment – Cars depreciate around 25% when you drive them off of the lot. If you haven’t provided enough of a down payment to cover that depreciation, you could find yourself ugly immediately.
Trading in too often – Buyers like to trade cars in and roll their outstanding balance in to a new loan. These unpaid debts can subscribe to negative equity.
A long time a loan – Five and six year loans often cause negative equity. You are able to often avoid it by keeping along loans to three years or less.
To be able to avoid a potential problem in the case of an accident, you must contact your insurance provider to ensure that you’ve “gap insurance.” Gap insurance will ensure that you are protected for those who have an accident whilst in an ugly situation. Without gap insurance, you could find yourself still making car payments even although you no longer have a car. That’s the last thing any car owner wants.