One of the biggest mistakes people make with their car is viewing it as an asset. An automobile is neither an asset nor an investment. It is, rather, an ongoing expense. The moment you drive a car off the lot, it depreciates in value, leaving you owing more on the vehicle than it is worth. This is called being “upside down,” and unfortunately where cars are concerned it is almost unavoidable. Even more unfortunately, many people make the mistake of thinking they have equity in a car and create more problems for themselves. Here are some things you should never do with car equity.
Rolling It into a New Loan
Although it’s one of the worst things you can possibly do, many people roll over this negative equity into new cars every couple of years. They do this by financing a new car, and adding additional money to the loan to cover what they still owe on their old car. This creates a downward spiral from which people can never escape. It is far better to pay off your old car before trading it in. Consider: you start off with a car for which you paid $15,000. After paying off $5,000 in the first year, you decide to trade it in on a new car. This new car costs $20,000, but you still owe $10,000 on your existing car, which is now valued at $8,000. Your trade-in value will be less, because the dealer needs to re-sell. Perhaps the offer is $4,000. So you take out a loan for $24,000 to make up the difference. Two years later you’ve paid down $8,000, and still owe $16,000. The car, however, is only valued at $12,000. You see where this is going.
Using Car Equity Loan to Pay off Other Debts
This is another common, but very bad, idea. A bank will sometimes allow you to take out a loan based on the equity you have paid into your car. This is sort of like a home equity loan, but using your car as collateral instead. This is also just about as bad an idea as it gets. Why is it a bad idea to get a car equity loan? You never remove money from an asset that depreciates instead of appreciating. You will owe that much more when the time comes to trade the car in and have no hope of ever recovering the equity you used on the loan. In the end, this ends up being very similar to rolling your upside down debt into a new loan. Before you know it, you are in deep and way over your head. Cars are necessary for millions of people. The mistake many make is viewing them as an asset rather than an expense. When you buy a car, consider it a loan to be paid down, not an investment you can use to generate more income. For more information about car loans, or if you are ready to apply for financing, drop us a line. We’re happy to answer all your questions.