If you’ve just purchased the car with loans, particularly one like a Tesla car, you’re likely to end up paying more than what you actually have to within the next few years.
In the third quarter of 2022, almost 16% of people who bought a brand-new car and 5.4 percent who used a car made minimum monthly payments of $1,000, according to Edmunds.
Users must pay the original loan amount at higher rates as vehicle values decrease, even if their cars are worth less. According to the Bureau of Labor Statistics, new car costs declined 0.1 percent and used car prices fell 2.5 percent in December.
The borrower has “negative equity” when the value of the assets offered as security for a loan is less than the outstanding amount. Debtors are “underwater” or “upside down” if they cannot make payments and sell the asset to pay off their obligations.
Buyers of Tesla Vehicles, Alert!
Tesla stated this week that it would lower U.S. prices on some variants of its most popular Car Y SUV by over 20% and the base Model 3, its least costly model, by 6% to boost sales. The price cuts would qualify more of its vehicles for an Inflation Reduction Act electric car tax credit.
The announcement enraged former buyers of expensive cars on Twitter. The price cuts diminish the value of new and used Teslas globally, leaving customers with loans to pay more.
Drury said, “If you just purchased one, you’re probably upset and upside down.” “The price of a new vehicle is the ceiling, and that ceiling just fell.”
Last two years, due to supply chain issues, customers have bought more expensive cars with positive equity on their loans and leases. Positive equity means selling your car would cover the loan and more.
Over the past several months, Drury said that customers have grown less protected from risky lending decisions.
- In 2021, you borrowed $30,000 at 4% for 60 months. After one year, you would owe $24,000. You may still have equity if your car’s value drops to $27,000. You may have positive equity.
- Last month, borrowing $30,000 at 7% over 60 months when the car’s worth may have dropped by a few thousand dollars. After two months, you’d owe almost $29,000, putting you underwater.
Data also showed that the average amount due for loans with upside-downs increased to $5,341 from $4141 during the 4th quarter of 2021. It was $5,059 by the end of the fourth quarter of 2020.
What are Your Options?
The best option in the event that you’ve already purchased your car and have committed to a substantial loan, Drury said, is to hold on to your vehicle until you’re able to. “Drive it ’til the wheels fall off,” Drury advised.
“Until your next transaction,” he said, “negative equity is okay. “You’ll have positive equity.” You’ve earned enough principal and interest to offset the initial loss by the end of the loan term.
Wait to buy a car unless you need one immediately. When the Fed increases its short-term Fed funds rate to limit inflation and increase spending forecasts, experts predict that the cost of cars to fall.
The Fed does not control consumer spending, but its rate increases affect the entire economy, and consumer rates usually follow. However, those rates may slow or stay the same next year.
In the coming year, prices “will return to normalcy,” Drury stated. “People will not be paying more than their MSRP (manufacturer’s suggested retail price). Manufacturers will provide lease and cash-back deals.
How to Get the Best Car Loan Rates?
Sometimes lifestyle changes necessitate buying a car immediately, or you desire one. If you literally cannot wait, consider these factors for the best rate:
- Find the best finance deal your credit score could obtain. Credit scores affect the rates lenders will offer you.
- Think about an additional cosigner who has a higher credit score than yours.
- Pay extra to counteract growing prices. Edmunds reported record fourth-quarter down payments for new and used cars at $6,780 and $3,921, respectively.
- Choose a short payback term. Longer terms may lower your monthly payment, but you may pay more.