Is your Auto Loan Upside Down?

You're driving innocently down the road, adhering to the speed limit, seat belt locked securely in place. You suddenly hit a patch of ice and go skidding out of control. Your car bounces off a telephone pole and flips over into a ditch. CRASH. Your car is totaled. Luckily, you're OK, and you have good insurance. But your insurance company values your car at $11,000, and you still owe $13,500. How could this happen? Suddenly, it's not just your car that's upside down - it's your car loan.

According to Edmunds.com, 40% of consumers are upside down on their auto loan. Simply put, being upside down means that you owe more than your car is worth. And, for most of us, what we owe above and beyond our loan is more than just a couple hundred dollars. The average negative equity on an auto loan is $2,200.

So, how do you get upside down in the first place?

• First, most consumers are taking advantage of paying little or no down payment, and they're also financing their tax, title and license. This can put you upside down before you even drive your car off the lot.
• Second, many of us opt for longer loan terms in order to have a smaller payment. While this can be an attractive option at first glance, a second glance reveals how much more you're paying in interest as opposed to toward the principal.
• Third, two words: vehicle depreciation. On average, a vehicle loses 15-20% of its value every year, with the steepest depreciation happening in the first two years.

Now, how do you stay right side up?

Keep your car until it's paid for, or until the amount you owe is equal or close to the car's market value.

Put at least 20% down, and do not finance taxes and fees.

Avoid a super-low monthly payment. Consider the highest monthly payment and shortest financing term you can afford. Ideally? Finance for 4 years or less if you can.

Buy a used car. New car smell can come in a can - the extra cash you'll have to pay to buy new does not.

Another tip? Consider gap protection. This type of coverage can make up the difference between your car's insured value and the loan payoff balance if your vehicle is totaled or stolen. Buyers who aren't able to put much money down on their new vehicle, those rolling an unpaid balance from an old loan to a new loan or those financing for more than 4 years are excellent candidates for gap protection. Most dealers and financial institutions offer this type of coverage; however, coverage through a dealer is often significantly more expensive. Wondering what the gap is between your car's value and your loan payoff balance? Simply get your loan payoff balance from your financial institution (those with a loan at Connexus can find this information through online banking) and compare it to the value found at www.nadaguides.com.

With a little planning, you can keep your car loan - and your finances - from being turned upside down. Looking for more information on this topic or how gap protection can help protect you? Contact Connexus. We're ready to exceed all of your expectations in '09 and beyond!