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Tuesday, August 22, 2017
Financial and Consumer Affairs Authority

Four things you can do to avoid negative equity

Are you looking to purchase a new vehicle? Do you still carry debt from your previous vehicle purchase? Be careful, taking on additional debt could put you in a poor financial position. Consumers who roll their negative auto debt forward into a new loan may find themselves in a position known as negative equity, which is owing more money than the vehicle is worth.

  1. Pay off existing vehicle loans. Avoid rolling existing debt forward into new purchases.
  2. Don’t be misled by low monthly payments, look at the total cost of the loan.
  3. Buy within your budget and stick to it.
  4. Consider a shorter term loan. Longer term loans are typically more expensive.

Look at the total cost, not just the monthly payment

Consumers often desire a more expensive vehicle than they can actually afford. Low monthly payments spread out over a longer period of time give the impression of affordability, but actually represent a much higher cost overall.

Don’t focus on a low monthly payment - know the total cost of the loan, including the price of the vehicle and the interest you will pay on the loan.

In this example, if you only compare monthly payments each vehicle looks almost the same, with only a difference in the payments of $21 per month, Option B seems very affordable but look at the interest paid and the total cost, it adds up.

Option A
Economy Car
Price: $16,000
36 month term
3% APR
$465/month
Interest paid: $2,322.68

Total Cost: $18,322.68

Option B
Mid-Size Sedan
Price: $32,000
72 month term
3% APR
$486/month
Interest paid: $9,556.59

Total Cost: $41,556.59




Knowing the total price will help you make better financial choices.

Infographic for Negative Equity

 

What could go wrong?

If you owe more than the vehicle is worth and it is destroyed, your insurance company will only cover what the vehicle was worth, not what you owe. You could be on the hook for a lot of money and have nothing to show for it.

Interest rates may be at historic lows now, and you may be able to afford the monthly payments now, but what happens if you have a variable rate loan and rates go up? Can you afford a larger payment? What if you need to refinance and can’t get approved?

Knowing how much you can afford if circumstances change is important for making big financial decisions like buying a vehicle. Crunch the numbers on a few scenarios and look at what kind of unexpected expenses you are able to afford.

Having negative equity on your car loan could result in you defaulting on other financial obligations such as mortgages and credit cards. It can affect your credit score and make it hard to get loans or credit in the future.

Call Consumer Protection Division

If you have questions about negative equity loans, you can contact us toll free at 1-877-880-5550 or by email: consumerprotection@gov.sk.ca.

Financial Consumer Agency of Canada

The FCAC has great content about vehicle financing. Learn more here.



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