Are you underwater on your car loan?

Do you owe more on your car than what it is worth? If you do, then you are ‘underwater’, and according to Chantellé Henning, the head of finance and insurance at getWorth, this is very distressing.

Henning says: “We frequently receive enquiries from customers needing to sell their cars, but facing negative equity. Even though getWorth offers competitive prices, it doesn’t always cover the outstanding loan. Their options become severely limited without the necessary funds to bridge this gap.”

She recounts a recent case. “A client needed to sell his premium 2022 model car, valued at R500 000. However, he was shocked to discover he still owed R700 000 on it, despite making payments for two years.

“We’re still dealing with the post-Covid aftermath,” explains Henning. “A shortage of new cars pushed up used car prices and new car costs, due to fewer promotions and discounts. Low interest rates and affordable repayments enticed many buyers to add extras to their vehicles, increasing their initial loan amounts. The auto market experienced a mini bubble, and consumers who bought during that time started their loans with a high base.

“Currently, used car prices are dropping again, meaning selling a car might not generate enough to cover your loan, leaving more people underwater.”

Henning highlights that getWorth’s car valuation data and AI algorithms indicate a more nuanced picture. Used car prices have stabilised, returning to the usual trend of depreciating as a car ages and gains mileage. Although the used car market faced a slump in mid-2023, it has shown signs of recovery recently.

How does one avoid this scenario? Henning offers some advice:

• Opt for a shorter loan term without a large final balloon payment. While monthly payments will be higher, you’ll pay down the loan faster and save on interest.
• Avoid adding unnecessary extras to your loan, like certain types of insurance.
• Carefully review what is included in your package and eliminate anything you don’t need.
• Consider buying a used car instead of a new one. New cars depreciate significantly in the first year or two, while used cars generally hold better value.
• Don’t roll the shortfall of your current car loan into a new car deal. It may be tempting, but you’ll eventually have to pay it off. Consider waiting to trade in your car until you’ve paid down more of your loan.
• Keep your car longer. Most car loans start out underwater because you buy at retail price, but need to sell at a lower trade price. It can take time to break even, so switching cars too soon can leave you underwater.
• Choose cars that retain their value well, and avoid adding too much mileage to luxury cars, as this can cause them to lose value faster than you can pay off the loan.

Source: MotorPress