Finance FAQs: The Upside Down And TDSR
May 10 2018, Jessica George
I know that financing and all of the terms that come with it can be a little confusing, but there are stranger things out there than car loans. In today’s post, I’m sharing what the terms upside down and TDSR mean to help Corner Brook and the rest of Newfoundland make educated vehicle financing decisions.
What Does Upside Down Mean for Car Loans?
Luckily, unlike on TV, upside down isn’t some crazy place where time and space are backwards and full of mystery. Being upside down with a loan is also referred to as negative equity. These two terms mean that the appraised value of your vehicle (for example, if you had your vehicle valued for a trade-in) is less than what you owe on the vehicle, or what is required to pay it off. This means, that you owe more than the vehicle is worth.
It happens! Different vehicles depreciate at different rates, and that’s alright. Being upside down isn’t a big deal when you’re driving your vehicle each day and aren’t making any changes to that. When it does come into play is when you’re looking to trade your current vehicle in for a new one and you’re upside down. Here’s an example:
If you have a vehicle that is appraised at a value of $10,500, but you owe the bank $11,500 on it, you’re not upside down to the bank. This is because you save taxes on the appraised value of the vehicle that you’re trading in. You’ll save the 15% tax on the $10,500 appraised value, which will bring your cash equivalent to a value of $12,075 and you’d come out ahead by $575. Being upside down doesn’t sound so bad now, does it?
What is TDSR?
If you’ve Googled it before finding this post, you might have found multiple explanations of what it means. In the auto finance world, it stands for Total Debt-Service Ratio. This ratio compares the amount of money that you make compared to the current amount that you’ve committed to pay out for regular monthly bills, such as property taxes, mortgage payments, utility bills, car loans, and so on. Things like heading over to Newfound Sushi or groceries don’t count, but recurring monthly payments do. Some payment calculators will take this into consideration, and some won’t. Keep this in mind when doing preliminary research online.
When you’re looking for a used vehicle loan (as well as most other types of loans), the largest amount that a lender or financing institution will let you commit to is 42% of your gross income. This means, that if you hear back that your TDSR is maxed or too high, that the amount you’re looking to borrow is too high in relation to your current gross income. When this happens, we can compare your income to loans for vehicles at different price points and interest rates to ensure that you’re not tipping into maxed-out TDSR territory. We want to ensure that you’re not overextending yourself, and building your credit rather than putting it in danger.
If you’re looking to have someone cosign, finance your car for you, or finance a car to help someone else, TDSR is important to keep in mind. If you’re a cosigner on a vehicle loan for someone else, this still impacts a portion of your total TDSR. I always suggest keeping your TDSR as low as possible without negatively impacting your quality of life. This way, you’ll have more disposable income in case of an emergency, as well as to do the things that matter most to you.
Whatever your finance situation, I specialize in finding loans for individuals and their unique situations. If you have bad credit, great credit, or no credit at all — that’s okay! I'm here to answer any questions that you might have, and our team will work hard to find you a great used car, truck or SUV. From here, I’ll get you into a loan that suits your budget and lifestyle. Apply today!