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long term loan

Leasing Won’t Put You “Underwater” With A Bad Long-Term Loan

July 28, 2017

As you may have noticed, the costs of new vehicles are going up. up, up. According to the analysts at Kelley Blue Book, the estimated average transaction price for passenger vehicles in the US in June 2017 was $34,442.

Higher costs are the result of many things: increasing fuel economy standards, new safety regulations, high-tech driver assistance technologies, more interest in expensive SUVs, and car buyers’ interest in having all the optional bells and whistles.

The Solution To High Costs: Long-Term Loan!

And as vehicle costs go higher, so do the costs of financing their purchase. To keep monthly payments affordable, vehicle loan terms have been stretching out longer, to six years, seven years, sometimes even as long as eight years! Down payments have also gotten smaller, again in the name of affordability. This all sounds like a great idea that makes perfect sense.

So you put the long-term loan deal together in the new car showroom and drive off in your shiny new car, truck, or SUV, firmly believing that this is a wonderful way to buy a vehicle. You’ll have six to eight awesome years of ownership, and then when it’s paid off you’ll figure out what comes next. What could possibly go wrong?

Quite A Bit, Actually

This would not be a huge problem if you actually did keep the car till the end of the long-term loan, but many people don’t do this for a variety of reasons:

  • They are bored with or don’t like the vehicle and want something else
  • Their needs have changed and they need a different type of vehicle
  • Their vehicle is out of the warranty period and expensive repairs have started to hit, so they want a new car with a new car warranty

So now you go out to shop for a new car with maybe half of the loan paid on the old one. You are in for a shock!

Depreciation Got You Down

Vehicle depreciation is a vicious thing in the short term. It reduces the value of your vehicle very quickly once you drive it off the lot, and continues at a rapid pace for the first few years of ownership. Back when loan terms were shorter, this wasn’t so bad – you were making larger payments relative to the car’s value, so you could better keep up with the rate of depreciation. But with a long-term loan, the car is depreciating much faster than you are paying off the loan. The result: you owe much more on the loan than the vehicle is worth on a trade. Trouble ahead!

This Is Why It’s Called “Being Underwater”

This situation is called negative equity, or being “underwater.” It is a deep, dark hole of extra debt that you have to deal with as you work the deal on your new car. This negative equity could be as much as several thousand dollars that you will have to cover to get into your new car. This is just like a gambling debt that you must pay off before you can drive your new car away.

So what do most people do? Without the cash on hand to pay off the difference on the old loan, the dealer will be only too happy to add the amount you are “underwater” into the loan on your new car. The result: even more debt for a longer term, and the cycle starts over.

The Possibility Of Drowning Is Real

But this time it is much, much worse, because no matter how long you own this new car, it will never be worth anything near the amount owed on the loan. The hole is now deeper, maybe too deep to climb out of. If you try to do this again with another car and another loan, it may not work. You may find that either you can’t afford the monthly payments, or you can’t get approved for what is now a huge loan without providing a large down payment that you don’t have. This is the end of the line.

Leasing Can Rescue You From An “Underwater” Situation

We have been spreading the word here about how leasing keeps you out of the depreciation spiral, because all the depreciation is built into your monthly payment. There is no other downside, since you walk away at the end of the lease and the residual value of the vehicle is strictly the concern of the leasing company. You are off the hook!

So let’s say you bought that vehicle and financed it with a long-term loan that is now underwater. Instead of refinancing your negative equity into another long-term loan and continuing the negative cycle, you put that negative equity into a lease. Your monthly lease payments will be higher, but the good news is that all of your  “underwater” debt will gradually disappear by the end of your lease! You are now free and clear – simply start a new lease and enjoy the benefits of never being “underwater” again!

You get a brand new lease on a brand new car that has a brand new warranty! If you aren’t crazy about your choice of vehicle or need something else, you can do that when the lease ends in just a few years! It’s a great way to drive!

Don’t Let This Happen To You

For all of you who have not gotten themselves into an “underwater” financing debt situation, congratulations! Leasing is the easy, economical, and trouble-free way to drive the new vehicle of your choice, without any of the disadvantages that come from long-term financing. There’s no contest!