Negative equity car loans should be avoided like the plague - wherever possible, you should never get into a situation where you find yourself in negative equity, as it can be a seriously difficult one from which to extricate yourself.
So just what is a negative equity car loan? You will hear those dreaded words if you end up owing more on your car loan than your vehicle is actually worth, which can make selling or trading it in a tricky task and could land you in serious financial difficulty.
Here are some tips on getting yourself out of a negative equity car loan and ensuring that you never fall into that trap again.
The two ways most people end up with negative equity, is by taking out a long-term loan having made little or no down-payment and rolling over a previous car loan into a new car loan, thereby substantially increasing the monthly repayments.
However, it is also possible to find yourself with a negative equity car loan if you are having to pay high interest rates (often because of bad credit) or if you have bought a car that has rapidly depreciated, rendering it worth less than the amount you are paying off.
Sometimes it's impossible to avoid getting into negative equity - if, for example, your car depreciates faster than expected - but often, if you do your research and are realistic about what you can afford, you can avoid falling into the pit of a negative equity car loan.
Try to find a car that will hold its value well over time.
Once you've found the car you want, spend some time negotiating the interest rate with the dealership as well as the price of the car, or use an online lender or a bank to ensure you get the best rate possible - it could save you thousands.
Make sure you pay your monthly instalments on time, as you will incur interest on anything you put off, which could leave you with a substantial amount extra to pay at the end of your loan period.
If you do find yourself with a negative equity car loan, the important thing to do is work out a way to get out of it before you sell or trade the car in.
The most obvious way is to keep the vehicle until enough of the loan has been paid off that the resale value is more than what you owe.
If you sell the car with a loan still hanging round your neck you will still owe money and have no car to boot.
If you trade-in your car, the dealership might agree to pay the remaining loan amount but will then add the extra to your next loan, leaving you with an even larger amount to pay off each month.
The best way to extract yourself from a negative equity car loan is to lease your next car.
Lease payments are substantially lower than those for loans and therefore might ease the financial burden somewhat, making it easier to rid yourself of your negative situation.
Just make sure that you keep the car for the full term of the lease or you will end up in deeper financial trouble.
Take steps to avoid negative equity car loans but if you do find yourself in that situation don't panic - don't try to immediately sell it or trade it in as the problem won't go away, it will follow you like a bad smell.
Stay calm, take heed of some of the advice in this article and you will gradually climb out of negative equity.