Negative equity might impact your car loan's overall interest charges. You'll pay more for your vehicle loan if you add excess money to the total loan amount. Lenders increase interest rates for lending terms over 60 months, so if you try to keep your payment lower by extending your loan term, you'll pay more in interest charges.
Interest Charges
If you've already secured the terms of a new loan and know your interest rate or the vehicle's manufacturer is offering low-rate financing, determine the difference you'll pay in interest charges when carrying over negative equity. Use an auto loan calculator to compare loan payback differences between loan options and to determine the impact the negative equity has on your monthly payment. If you don't know your interest rate, apply for a pre-approval. Find special interest rate offers online at the dealer's or manufacturer's website.
Loan-to-Value Ratio
Your credit determines your total loan approval amount, which is based on the vehicle's lending value. With poor credit, you might obtain an approval for only 60 percent of the vehicle's value, or you might obtain as much as 120 percent of the vehicle's value with good credit. Lending value is based on the vehicle's sticker price and does not take rebates or discounts into consideration. If you have a poor loan-to-value ratio, you may have to provide a down payment that covers negative equity and a portion of the new car's cost.
Rebates and Discounts
Shopping for a vehicle with rebates helps to roll over negative equity. Rebates are automatic price discounts provided by the manufacturer, viewed as a down payment, not a price deduction. Shopping for vehicles at the end of the model year or during a holiday sale might provide increased discounts. If your dealer reduces the vehicle's sticker price, you can add more negative equity to your new loan. For example, a $25,000 vehicle with $4,000 in rebates and a dealer discount of $1,000 off the sticker price results in room for $5,000 of negative equity, assuming your loan-to-value ratio is 100 percent.
Considerations
If you live in a state that recognizes a tax deduction for trade-ins, you might not carry over as much negative equity as you think. Depending on your tax rate, your trade-in might save you thousands in tax charges. For example, if you live in an area with a 10 percent tax rate, purchase a $30,000 vehicle and trade in a vehicle worth $15,000, you'll save $1,500 in tax charges. Tax savings combined with rebates might decrease a down payment requirement or create a more affordable monthly payment for a shorter loan term.
0 comments:
Post a Comment