How To Avoid Being Upside Down On A Car Loan

By Erik Folgate

What does being upside down on a car loan mean?

It means that you financed a car with little money down, and now you owe more money than the car is worth. This is very easy to do, because cars depreciate at a rapid pace for the first 3 years of their life. Let’s be honest, they depreciate rapidly their WHOLE life. You can list a car as an asset in your balance sheet if you want, but you’re kidding yourself. It’s not an asset or an investment. It’s an expense. No, I’m not a Robert Kiyosaki follower. I treated cars this way before he wrote “Rich Dad, Poor Dad”. He even calls your personal house an expense, which I strongly disagree with. But anyway, getting upside down on a car loan is extremely common, and many people don’t find out until they try to sell or trade the car a few years after the purchase. So, how can you avoid getting upside on your car loan? Here are a few tips.

• Don’t finance a car. The easiest way to avoid being upside down on a car loan is to buy one with cash. If you don’t have much money or you don’t have a lot of money to save once all of the bills are paid, then you’d have to settle for an older car with low mileage. If you have the ability to save a lot of money in a little time, then all you need to do is delay your pleasure of buying a newer car and save up for the car to buy it outright.
• Treat a car purchase like a house. If you’re completely enamored with having a new car and you can’t wait to have it, then you should at least try to save up 20% of the purchase price. This will be your best defense against the horrendous depreciation that your new car will experience over the next two years.
• Pay more than the specified monthly payment. If you’re going to finance, I would get a five year loan so the monthly payment is small. Then, pay one a half to two times the amount of the car payment. You’ll pay off more of the principal early on. Car loans are just like mortgages, they front load most of the interest so you pay more interest in the beginning of the loan and less at the end of the loan.
• Keep the car well maintained. Don’t drive the car across the country and back. Keep the paint job nice. Get all of the maintenance done quickly so a bigger problem does not arise. Keep the interior nice. If you don’t rack up the car mileage and keep it nice, the resale value will be in the upper tier rather than the lower tier for resale.

Someday, I hope to be in a position where I can save up enough money to buy new cars without it being any kind of strain on my finances. Wealthy people don’t finance cars. They pay cash for them and drive them for a long time. Make your goal to stop the cycle of going from one car payment to another. If you break that cycle, you’ll be one step closer to achieving independent wealth.

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