Smart Payment Plan Looks at How Building Vehicle Equity Can Get You Ahead

As the experts at Smart Payment Plan advise, building equity in a vehicle should be a top priority for all car owners. Negative equity can put you in an unfortunate financial situation when the time comes to sell your vehicle. But if you take proper steps to build equity, you will improve your financial prospects.
Some car owners don’t understand the importance of avoiding negative equity, even though many consumers find themselves in this position. Negative equity means that you owe more on your car than it is worth. More and more Americans are facing this problem because of high interest rates, diminishing vehicle value, and poorly-designed payment plans.
In fact, 30 percent of consumers had negative equity on their vehicles in 2007, according to Debt.org. On average, people owed $3,600 on their old cars when they proceeded to trade them in for newer ones. It’s an unfortunate reality that many people owe thousands of dollars on vehicles that they no longer own. In many cases, negative equity situations can be attributed to lengthy finance contracts that make monthly costs lower but force up the price of the car due to interest.
“For most people, their two largest monthly expenses are their residence and automobile. As an individual consumer’s debt increases, it’s logical that he or she would want to reduce the cost of these major payments. One way to achieve this goal is to seek a more affordable car payment by extending the length of the auto finance contract, but there’s a price to pay for that lower payment,” explains Steve Bowman, Chief Credit and Risk Officer for GM Financial.
For example, a 72-month finance contract can result in monthly payments that are 10 percent lower than a 60-month contract would present. It might be easier to make those monthly payments, but the vehicle will cost more in the long run and will depreciate regardless of those payment terms.
According to professionals at Smart Payment Plan, a bill payment service, there are many ways to ensure that you build equity in your vehicle. Bill service companies such as theirs allow you to shorten your payment contract, saving you money on interest. By the time you’re ready to sell your car, you will have built equity.
“We usually see someone using our system that they own $1,500 to $2,000 more in equity in their vehicle or home than if they did not use our system. A bank doesn’t want you to pay that debt off because that’s how they’re making money. A company like us does want to see you get out of debt to make your life simpler,” explains a Smart Payment Plan spokesperson. “The benefits are that you typically own your car or house sooner, you’re creating a cash flow, and it’s just more convenient overall.”
Some consumers might think that negative equity can be avoided if they trade in their vehicle to a car dealer who promises to pay off the remaining loan balance. But when people have negative equity and owe more than the value of their car, the dealer’s offer may not apply. That negative equity may be calculated into the new car loan, which can increase the buyer’s new car payments through compounding principal and interest.
But how can you determine whether you have negative equity? First, find out how much you need to pay off on your loan. This may require that you contact the lender. Next, gauge the current value of your car by using an appraisal from Kelley Blue Book or other online resources. Determine the condition of your car and calculate its value using the website’s tool. If the calculated value is lower than your payoff, than you have negative equity.
Using a bill payment service may also be extremely beneficial for avoiding this problem. Such programs ensure bills are paid automatically and on time and often result in shorter, more easily-manageable bill payments.
As the Smart Payment Plan team advises, there are a number of other steps you can take to build equity. Making a down payment of at least 20 percent of the total vehicle cost is a good rule of thumb. Keep in mind that a car often loses roughly 20 percent of its value within a year, especially when purchased brand new. That’s why you will want to make a sizeable down payment on any new car.
Before you sign on the dotted line to finalize a vehicle purchase, research Kelley Blue Book or Consumer Reports to determine its true value. Make sure you aren’t paying more than that number, or else you will certainly find yourself in a negative equity situation. Furthermore, it’s a smart move to opt for the basic model of your vehicle. If you buy into extras, the extra price may be more than the car is worth.
Negative equity can put you in a difficult financial situation. But if you use smart buying practices and negotiate your bill payments appropriately, you can protect yourself. Through bill management programs like Smart Payment Plan, building equity in your vehicle is easy to accomplish.
Carly Fiske contributed to this article.