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Gas Prices Now Affect Re-sale Value--And Car Loans

Richard Barrington
LoanBiz Columnist

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Re-sale value may be the last thing people think about when they get a car loan, but it should be a consideration. Otherwise, a car buyer may be in for an unpleasant surprise--and find his or her options limited when it's time to buy the next car. What is further complicating this dynamic--by causing some vehicles to depreciate more quickly than in the past--is the rising price of gasoline.

Gas Prices: The After-Sticker Shock

The rise in gas prices over the past few years is probably the greatest economic shock of this generation. For one thing, the magnitude is considerable--the price of a gallon of regular gas has tripled so far during this decade. For another thing, the impact of gas prices is pervasive, affecting an everyday activity for most Americans.

Buyer Behavior Responds

Americans were willing to bear with a certain amount of this increase, but as the cost of gas continued to rise--and the fear of further price increases grew--buyer behavior began to change.

Changes in buyer behavior due to rising gas prices is evident in several ways: increased use of mass transit, a decrease in discretionary driving, rising demand for hybrids and other fuel-efficient cars, and a drop in demand for gas-guzzling SUVs.

It is this last point that is diminishing the re-sale value of certain vehicles, and which should be factored in when someone decides to get a car loan for a low-gas-mileage vehicle.

Re-sale Value and Car Loans

If a buyer decides to buck the trend and buy a low-gas-mileage vehicle, he or she should expect the vehicle to depreciate more quickly than in the past. If the car buyer expects to drive the car for many years, this is no problem, but if the intention is to sell or trade in after a couple years, it may be best to get a car loan with a shorter length. While this will mean a larger car payment, it will help avoid having the car loan get too far "under water."

Having a loan under water means the remaining balance is much greater than the car is worth. This creates a financial burden if the owner wants to sell or trade in the vehicle when a loan on it is under water. To avoid this, buyers of low-mileage vehicles may not just have to accept the burden of higher gas prices; they may have to deal with higher car payments as well.

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About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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