Motor Finance…Are You “Upside Down”?

Motor Finance: What is Minus Equity?

With motor finance it is quite common for people looking to upgrade their cars to get the latest model to find they are in a predicament referred to in the motor industry as Minus Equity or Upside Down. If you are “Upside down” it means in car finance speak that you owe more money to a finance institution on your car than what it is worth.
The main difficulty associated with being in this predicament is that unless you have the ready cash available to cover the minus equity amount and you are looking to get motor finance again, you will need to borrow substantially more than the value of the new vehicle to acquire the new car.

How did we get your Motor Finance Loan ”Upside Down”?

There are a number of factors relating to motor finance that combine to place a person or persons into this financial situation so we’ll deal with the main ones:
  • Depreciation– A car, boat, bike, truck, computer or for that matter, most general consumable goods are referred to as fixed depreciating items. What this means is that from the moment you acquire those goods they start going down in value or price. It’s a sad fact that some goods reduce in net value much faster than others. Cars and boats, for example, being high ticket items stand to drop more in value as they age. Now because your motor finance loan outstanding balance reduces at a slower rate, due in fact to the reducible set up of the loan, you end up owing more to your finance provider than the value of goods at trade-in. slower than your car value you end up…You guessed it – Upside Down.
  • Changing cars Too Early!- Experience has shown me that most people borrow money for the longest term possible on their motor finance loan to keep their monthly repayments at a lower and more affordable level. While I see this overall as a good thing, a problem occurs when you are only say, 2 years into a 5 year term on your loan and you decide to update your vehicle. The reason being that because most motor finance loans are “top end loaded” and by that I mean you pay more interest than principal in the first few years of a loan; your loan balance is still relatively high. Combine this with the first factor; Depreciation and you invariably end up Upside Down. What’s worse is the more expensive a car you have the larger the amount of minus equity you incur on your motor finance.
  • Not paying enough off your current motor finance loan- You may be saying why here because you are making your current payment on time! As I mentioned in the previous factor; consumer loans are “top end loaded”. The only way to resolve a possible minus equity situation is to pay more money or higher instalments on your car loan to reduce your balance outstanding on your loan. Important Note: Any amount you pay that is more than the standard monthly repayment on your motor finance loan reduces the principal debt! By paying an extra $10 per week on your motor finance loan you can reduce the overall loan term by up to 12 months. Please keep that in mind if you like to update cars regularly.
  • You may have had Minus Equity when you last took out motor finance- It is common for dealers to play around with figures to get to your changeover price. The can under net and over allow on a trade-in and can also tweak the dealer allowance to mask minus equity. If you were upside down on your last loan and haven’t paid extra on this new loan to catch up you could be in for a world of pain when you go to update again.

Motor Finance - The cure for minus equityThe Cure for Motor Finance Minus Equity

There are a number of cures for minus equity in motor finance. As I mentioned you could pay more off your motor finance loan and reduce your loans balance. You cut save up and put a decent deposit or down payment on the car when you buy it. You could wait until you are at least 80 per cent into your loan term where you have most of the principal paid off. You could shop around for lower rate motor finance and pay off the current loan (Make sure you keep paying the same payments or more on the new loan). You could get mum and dad or a rich relative to advance you the money or sell some unneeded stuff on Ebay and pay down your motor finance loan balance. Whatever you do make a plan and stick to it. If you have to keep the goods for another year then so be it. Please feel free to email Finance Stress Free at info@financestressfree if you have any specific questions.

© 2011 Motor Finance Minus Equity