It’s expensive purchasing a car and it only gets much more as time goes on. As time passes, the price of new cars has increased faster than the rate of inflation. This isn’t entirely due to greed on the element of automakers; cars may also be more complicated and useful than they used to be. Sure, they were cheaper in the 1960’s, however they didn’t include air conditioning, air bags and video systems. Convenience and safety comes at a price.
With the increase in price comes an increase in the period of time folks are taking to pay off their cars. Few people pay cash; most people sign up for loans and pay over time. The average car loan, which was previously repaid over a period of four years, now averages about six years in duration. That’s quite a while to cover a vehicle, especially if you don’t have any plans to own it for that long.
Taking six years to cover a vehicle has its advantages, since the payments are lower than they would be over a smaller loan term. This type of long loan does have a substantial disadvantage, though – you can find yourself in an adverse equity, or “ugly”, situation. This could be a serious problem – should you total the car in an incident, your insurance company will simply pay you the worth of the car, and not the amount you still owe.
A customer is described as being ugly when he or she owes more on a vehicle loan than the car is worth. It’s no problem finding yourself in a upside situation, and it may occur under some of the following circumstances:
Insufficient down payment – Cars depreciate around 25% the moment you drive them off the lot length of car. In the event that you haven’t provided enough of a down payment to cover that depreciation, you could find yourself ugly immediately.
Trading in too often – Buyers want to trade cars in and roll their outstanding balance right into a new loan. These unpaid debts can contribute to negative equity.
Too much time a loan – Five and six year loans often result in negative equity. You can often avoid it by keeping the length of loans to four years or less.
To be able to avoid a potential problem in the case of an incident, you need to contact your insurance provider to be sure that you have “gap insurance.” Gap insurance will be sure that you’re protected for those who have an incident during an ugly situation. Without gap insurance, you could find yourself still making car payments even if you no longer have a car. That’s the final thing any car owner wants.