A car depreciates each per year, on average. If a car loan term is longer than 48 months, the value of the car is less than the loan balance for the first three years.
If something happens to the car in that time, you will be underwater. The insurance pays the wholesale value, and you have to come up with the rest.
That’s completely separate from the finance charge. Unless you have perfect credit and can get a very low rate, a 5 or 6-year loan is very expensive.
If you have to finance it, buy something you can pay off in 48, or preferably 36 months. Then keep saving that car payment until you can pay cash for your next car.
I somehow dropped the number: a car depreciates 20% each year, on average.
Many insurance companies offer "gap insurance". Some don't. For instance, GEICO doesn't and that caused me to switch to another carrier when I got a new car loan. Got the loan from my credit union @ 1.99%.
I save a car payment in a separate account every month......even though we haven’t had a car payment in almost 20 years. When we need a newer car I take advantage of the fact that someone bought a nice, new, luxury model and within a year figured out they couldn’t afford it and turned it in. They are less than 1 year old with very few miles on them. I then make a heckuva deal and pay cash for it out of my car payment account.
We have a Mercedes and a Jaguar we bought like that. The Jag is 10 years old now so have been looking around again. Just haven’t found anything I like better than it
Many companies offer 0%, but you have to have stellar credit. Luckily, I do.
If something happens to the car in that time, you will be underwater. The insurance pays the wholesale value, and you have to come up with the rest.
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New car dealers require gap insurance for under water car loans.