As vehicle financing terms extend past five-years, the Financial and Consumer Affairs Authority (FCAA) is warning consumers against negative equity.

According to the FCAA, there are two common scenarios where consumers may end up owing more than their vehicle is worth and ultimately ending up with negative equity. First is in a situation where buyers trade in a vehicle that has not been paid off, then adds that debt into the financing on the new vehicle. Second is when prospective buyers are attracted to lower monthly payments, however these deals are generally spread over seven or eight years, compared to the previous norm of four to five years. In either scenario, the purchased vehicle will still depreciate at the normal rate and the consumer will be left with outstanding payments if they decide to trade it in, or purchase another vehicle.

The FCAA is encouraging consumers to be aware of the potential implications of entering into extended term loans and offer tips to avoid such scenarios:
• Consider a shorter-term loan to minimize the possibility of being in a negative equity situation
• Pay off existing vehicle loans and avoid rolling negative equity forward into new purchases
• Don’t just focus on the monthly payment, consider the total price of the vehicle including interest paid due to the length of the loan
• Have a budget in mind and stick to it

If you are in the market to trade in your vehicle where negative equity may be a reality, you may want to revise your buying options before entering into a long term loan with potential long term problems.