Typically, this happens when consumers trade-in a vehicle, and roll the remaining debt forward into the financing of a new vehicle.
FCAA is warning that extended term loans (ETL) and the potential implications of negative equity could lead to a risky financial position for buyers.
Deputy director of FCAA’s consumer protection division Denny Huyghebaert said the new norm is for consumers to finance their vehicles over a period of seven or eight years, compared to four or five years.
“This is a significant time difference, as a vehicle will depreciate rapidly the moment it is driven off of the lot,” Huyghebaert said in a press release.
“Consumers who purchase vehicles based on low payments due to ETL are at a greater risk of being in a negative equity position when it comes time to trade-in and purchase another car.”
FCAA said advertisements offering low rates, longer terms and low monthly payments make vehicles seem attractive, but it is important to know these may make it difficult to pay off the loan before buying a new automobile.
Tips from FCAA to avoid negative equity:
- Consider a shorter-term loan;
- Pay off existing vehicle loans before new purchases;
- Don’t just focus on the monthly payment, consider the total price of the vehicle and the length of the loan; and
- Have a budget in mind and stick to it.