Upside down on your trade?

Flipped, upside down, negative equity, buried in the trade. All these phrases mean the same thing. You owe more on your car than what it's worth.

How is something like this even possible? With lenders and dealers becoming more aggressive and customers wanting nicer cars for less money, compromises in financing are made. Extended financing terms, higher interest rates, low down payments and trading out of cars early can all contribute to owing more on the car than what it's worth.

20 years ago, it was common practice to put at least 20% down on the car and finance for 36-48 months. But as consumers tastes rose with the prices of the cars, terms had to be extended so people could pay for these loans. Terms started to rise slowly and today there are car loans up to 120 months.

Also, take into account that the average car loan is now over five years. While the average consumer keeps this new car only two and a half years. That means the average person is trading in a car that is only half paid off.

People who buy a car new are especially open to becoming "upside down". New cars take a large depreciation hit as soon as you buy them. People are willing to put up with this to get the exact car they want or to have the peace of mind of driving a new vehicle.

Factor all these things together and you have an estimated 65% of all consumers trading in a car with an active car loan are upside down.

So how can you avoid negative equity? Try and purchase your car with the shortest term you can afford. Also, put down enough money to cover your sales tax and 20% of the price of the vehicle.

Negative equity is a trend that's unlikely to change in the near future. Try and avoid it by purchasing a car that is reasonable based on your income. Attempt to purchase the car at the shortest term you can afford and save a reasonable down payment to buy the vehicle. If you follow this advice, you can be confident you will never have to deal with being buried in your vehicle, from a sales standpoint that is.