Buying A Car It Can Buy You Out And Turn You Upside Down!

It now takes an average of six years for the average American to repay his or her car loan

. By spreading payments over such a long period of time, the buyer may turn out to be "upside down", and that can be a painful experience.

The price of automobiles has gone up - since my birth in the pre-war era, to the hippy-dippy generation I never understood, to the "Generation X" I couldn't quite understand either, up to the present. Over time, the price of new cars has increased faster than the rate of inflation. This isn't entirely due to greed on the part of automakers; cars are also more complicated and useful than they used to be. Sure, they were cheaper in the 1960's, but they didn't include air conditioning, air bags and video systems. There is a hefty price tag on safety and entertainment, after all.

The increase in the price of new cars is analogous to the increase in the length of time it takes the average person to pay off their car loans. Cash payments are virtually unheard of nowadays, as most of us choose to pay through an auto loan. The average car loan, which used to be repaid over a period of three years, now averages about six years in duration. Indeed, that's an eternity in automotive years - not only is it a bigger financial burden, but cars tend to become obsolete much quicker these days.

Taking six years to pay for a car has its advantages, as the payments are lower than they would be over a shorter loan term. Such a long loan does have a significant disadvantage, though - you can find yourself in a negative equity, or "upside down", situation. You would only be paid the car's financial value if and when it is totaled - and that value isn't much, of course - and not the value of the vehicle you are still in arrears for.

A buyer is described as being upside down when he or she owes more on a car loan than the car is worth. Be warned, for it takes so little to make a buyer feel topsy-turvy about things, and here are some of the events that could lead to this:

Insufficient down payment - Cars depreciate as much as 25% the minute you drive them off of the lot. You may find yourself in one of these upside down situations if your down payment isn't enough to cover the automobile's depreciation.

Frequent trading in. Many consumers think they are doing something suave by trading in their vehicles and rolling whatever outstanding balance remains into a new loan. These are not recycled loans, but rather a fast way to ruin your equity.

Extremely long loan terms. If your loan gives you five to six years to pay off, you put yourself at the risk of negative equity. By staying within three years or less, you can avoid this upside down situation quite easily.

Of course you would want to avoid the problems that auto accidents could bring, so it would be a good idea if you did some research and contacted your insurance provider about gap insurance. Gap insurance will give you the coverage you need for those accidents that might happen when in an upside down situation. Without gap insurance, you may find yourself still making car payments even though you no longer have a car. And nobody but nobody wants that to happen, right?

by: Olivia Lake

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