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Drive Your Dream Car, Avoid the Rise in Negative Equity
Published: October 28th, 2024.
If you dream of driving a new car but are worried about ending up in a financial hole, you’re not alone. According to recent data from Edmunds, more and more car buyers are finding themselves “upside down” on their loans—owing more on their vehicles than they’re worth. In fact, in Q3 2024, the average amount owed on upside-down loans hit an all-time high of $6,458; for some, it’s even worse. More than 1 in 5 car owners with negative equity owe over $10,000 beyond what their vehicle is worth!
While that sounds scary, don’t panic! If you want to drive the car you love without falling into the trap of negative equity, you can make a few smart moves to protect your wallet.
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Why Is Negative Equity Rising?
There are a couple of reasons behind this trend. Many buyers who purchased cars during the vehicle shortage in 2021-2022 paid above MSRP (manufacturer’s suggested retail price). With the market stabilizing and trade-in values for newer cars dropping, those buyers find themselves owing more than their cars are currently worth.
Another reason is longer loan terms. More people opt for five- to seven-year loans to keep monthly payments low. While this might seem like a good idea at the time, cars lose value quickly, and a longer loan makes it easier to end up upside down if you decide to trade in early.
How to Avoid the Negative Equity Trap
If you’re thinking about buying a new car but don’t want to end up buried in debt, here are some tips to keep in mind:
- Think long-term about your vehicle: If you like to trade in cars frequently, it’s important to be realistic about your loan terms. A seven-year loan might lower your monthly payments, but if you know you won’t keep the car for that long, you’re more likely to owe more than it’s worth. Instead, choose a loan term that matches how long you plan to own the car
- Focus on resale value: Not all cars hold their value equally. When shopping for a new vehicle, look for brands and models known for retaining their value over time. This can make it easier to trade in your car later without being underwater on your loan. Additionally, consider vehicles that offer financial perks like better fuel efficiency or lower insurance costs, which can help free up money to pay down your loan faster
- Shop around for financing deals: While incentives and lower APR financing aren’t as common today as they used to be, it’s still worth shopping around. A lower interest rate can make a big difference in how quickly you can pay off your loan—and reduce the chances of being stuck with negative equity
Most importantly, buy the car you love. Edmunds’ Ivan Drury says, “Find a car you really want and like because if you don't, you'll probably end up making the same mistake of trading in your newish vehicle too soon." By choosing a car you’re happy to stick with for several years, you can avoid the cycle of constantly upgrading and the financial stress that comes with it.
Even with negative equity rising, you can still drive your dream car. The key is to be smart about how you finance it and how long you plan to keep it. Choose a car you love, think beyond the monthly payments, and look for a vehicle that will hold its value. That way, you can enjoy your ride without worrying about being upside down on your loan.
Remember, the goal is to love your car while keeping your finances in check. With proper planning, you can prevent negative equity pitfalls and own the car you’ve always dreamed of.