How do you get upside down in a car loan? It’s simple. Long term financing with little, or no money down can create an upside down loan, especially if you trade your vehicle before it is paid for. The other factor most people overlook is depreciation.

New cars go down in value like a rock!

Some new cars can lose as much as 15% to 25% as soon as you drive it off the lot. This quick depreciation, and the accelerated depreciation every year, can leave you owing much more on your car then what it is worth. estimates that over 40 percent of consumers are upside down in their car loan, by an average of $2,200.

If you are already upside down in your car loan…

Your situation may be improved if you sell that new car and buy a much cheaper car. Even though you may still owe money, you’ll owe much less money; and you will have gotten rid of that depreciating money pit.

Tired of being upside down in your car loan?

Here are 7 tips to help manage your loan:

1. Always put down some cash. At least 20% or more of the vehicle’s cost. This is usually enough to cover the taxes, fees and the first year depreciation. Do not finance taxes and fees.

2. Forget those long term loans! If you have to finance for more than 60 months, you probably can’t afford the car you are looking at. Take out the shortest-term loan you can afford. Even though you are paying a little more each month, a bigger portion of your payment will go towards paying down the principal. This way you can build equity much faster.

3. Don’t take out a loan any longer than you intend to keep the car. Most people trade their cars between 2 1/2 and 3 years. When you trade your vehicle with payments remaining, you have to make up the difference in cash. You may be forced to roll over the negative equity in your new car loan, thus creating a cycle of being upside down in your car loans forever and ever.

4. Consider gap insurance. If your vehicle is stolen or totaled out in an accident, gap insurance will make up the difference you owe on your loan and the value of your car. Gap insurance will increase your monthly payment a little bit, however, the peace of mind is well worth it. It could also save you having to come up with a ton of cash if you had a loss.

5. Buy a used car instead of new. Let someone else take the big hit on the depreciation. Buying a car that is one or two years old could mean the car will hold its value better over the life of the loan.

6. Keep your car until its value matches or exceeds what you owe on the loan. Yes, it may be old and starting to lose its luster. But, driving that car could save you from a long-term financial disaster.

7. Consider working with an auto broker. Auto brokers are very knowledgeable and know the inside secrets of the car business. They can be very helpful because they represent you and work with your best interest in mind.

After you get rid of that upside down car loan, start a car replacement fund so you can pay cash for your next car. As time goes on you will be able to trade up in a car, but only do so when you can pay cash! Who knows; maybe you’ll find yourself driving a million mile car one day and never have another car payment again. How sweet it is!

Source by Mike Reitz