It’s expensive buying a car and it only gets more so as time goes on. Over time, 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 part of automakers; cars will also be more complicated and useful than they used to be. Sure, they certainly were cheaper in the 1960’s, nevertheless they didn’t include air conditioning, air bags and video systems. Convenience and safety comes at a price.
With the escalation in price comes an increase in the period of time individuals are taking to pay for off their cars. Few people pay cash; many people take out loans and pay over time. The typical car loan, which used to be repaid over an amount of 36 months, now averages about six years in duration. That’s a long time to pay for a car, particularly if you haven’t any plans your can purchase it for that long.
Taking six years to pay for a car has its advantages, as the payments are less than they would be over a smaller loan term. This type of long loan does have an important disadvantage, though – you can find yourself in an adverse equity, or “inverted”, situation. This can be quite a serious problem – should you total the automobile in an accident, your insurance company will only pay you the worthiness of the automobile, and not the total amount you still owe.
A customer is described as being inverted when he or she owes more on a car loan than the automobile is worth. It’s simple to find yourself in a upside situation, and it could occur under the following circumstances:
Insufficient down payment – Cars depreciate as much as 25% the moment you drive them off the lot. In the event that you haven’t provided enough of a deposit to cover that depreciation, average length of a car you may find yourself inverted 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 donate to negative equity.
Too long a loan – Five and six year loans often cause negative equity. You can often avoid it by keeping along loans to 36 months or less.
To be able to avoid a potential problem in the event of an accident, you must contact your insurance provider to be sure that you have “gap insurance.” Gap insurance will be sure that you are protected for those who have an accident whilst in an inverted situation. Without gap insurance, you may find yourself still making car payments even if you no longer have a car. That is the final thing any car owner wants.