There are many reasons you want to be in a positive equity position on your auto loan.
First, it makes your purchase more secured. In case your vehicle gets totaled or stolen, a conventional insurance provider would only bother to pay its current market value, not the actual balance on your auto loan. As such, it's possible that you'd continue paying for a debt even if you no longer have your car.
Second, your unpaid vehicle only becomes a good trade-in if it's with positive equity. If you owe more than you own on car, it might really be a good bargaining tool.
As an auto loan itself can become a bad debt, turning it upside down may only make things worse.
To avoid being in a negative equity position, consider the following:
Put Down Big
Upside-down auto loans usually happen when the down payment is low. Remember, you can lose up to 11% of your vehicle’s value after driving it off the lot for the first time. As such, your loan is automatically turned upside down if your deposit is less than 11% of the sale price.
Lack of cash is the main reason you’re trying to get an auto loan, but it doesn’t mean you’d completely rely on the financing to buy the vehicle. You must save and put down as much money as you can to quickly build equity on your car.
Buy a Vehicle with a Slow Depreciation Rate
All vehicles depreciate over time, but some lose their value slower than others. Marketability and gas mileage are only two of the many factors that affect a ride’s depreciation rate.
More popular vehicles tend to depreciate longer than cars with less demand because the former can get resold easier. In addition, gas guzzlers lose their market value faster than vehicles that use less gasoline. This is why many buyers prefer crossovers over SUVs as of late, especially the more recent versions of Chevy Traverse in Indianapolis, San Diego, Atlanta, and other major cities.
Make Principal-Only Extra Payments
Paying more than what’s due doesn’t only help you build equity on your vehicle, but also allows you to finish your loan early. Not all lenders would let you do this, though. If you can, make the most of this option to cut down on your principal balance and save interest over time.
Negative vehicle equity doesn’t just happen, but it’s most likely due to the consumer's shortcomings. If you’re not prudent enough, you can't blame anybody if your auto loan becomes upside down.