Understanding Negative Equity: The Risks of Focusing On A Monthly Vehicle Payment
Planning to trade-in a vehicle? The Financial and Consumer Affairs Authority (FCAA) is warning consumers about the dangers of extended term loans (ETL) and the potential implications of owing more on a vehicle than it is worth. This scenario is called negative equity.
“Today, it is common for consumers to finance their vehicles over a period of seven or eight years compared to four or five years, which was the previous norm,” FCAA’s Consumer Protection Division Deputy Director Denny Huyghebaert said. “This is a significant time difference, as a vehicle will depreciate rapidly the moment it is driven off of the lot. 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.”
As a result of entering into a ETL agreement, consumers will typically be trading-in a vehicle they still owe money on and this debt would then be rolled forward into the financing of a new vehicle. Advertisements offering low rates, longer terms and low monthly payments make vehicles seem attractive and affordable, but it’s important to know and understand the total cost of the transaction.
Four Tips to Avoid Negative Equity:
- Consider a shorter-term loan to minimize the possibility of being in a negative equity position.
- Pay off existing vehicle loans. Avoid rolling negative equity forward into new purchases.
- Don’t just focus on the monthly payment, consider the total price of the vehicle and the length of the loan.
- Have a budget in mind and stick to it.
Contact Consumer Protection Division
For more information about negative equity, visit http://fcaa.gov.sk.ca/consumers-investors-pension-plan-members/consumers/consumers-of-goods-and-services/purchasing-and-repairing-a-vehicle/negative-equity.
Consumers with questions can call toll free at 1-877-880-5550 or by email at [email protected].