Are you “upside down” on your current car loan?
In the old days, most car loans were not longer than 36 months. And you had to put down 20% or more. Well, that’s not the case today. Now you can get auto financing of 60 months or even 72 months. And you don’t have to put anything down with some of these types of loans. While a long car loan term may be appealing in terms of the monthly payment amount, they are terrible in terms of how much you’ll pay in interest relative to the amount you’re borrowing.
The bottom line: The longer the payment term, the lower the monthly payment will be, but the longer term will also mean you pay a lot more in interest. The effect of this is to coax a buyer into purchasing something at a price they can’t really afford. This was also done over the past decade in the mortgage industry. And that’s one of the key reasons that so many people are struggling with their house payments since the crash of 2008/2009.
Is your current vehicle “under water”?
Unlike a house, an automobile is an asset that depreciates rapidly. With these long-term auto loans, the likelihood that the car will depreciate faster than the amount being paid on the car’s principle is very good. What that means is that even if you’re three or so years into the loan, it’s very possible that you will still owe more on the car than it’s worth. That’s a lousy situation. And frankly, it’s also a bad financial situation in which to put yourself.
If you find yourself in a situation where you owe more on your current car loan than the car is worth, to buy a new car you’ll need to roll the old car’s loss into the new car’s loan. This, effectively, creates a MORE expensive new car as the loss on the old car is loaded onto the new one you’re buying. If the new car is also on a longer-term loan then the odds are that it will also lose value faster than you are able to pay principle on the loan. And that means, in the future when you need to buy another car, you could find yourself rolling even more loss into your next loan.
Stop letting your car drive you into the poorhouse. If your current car loan is under water, then don’t buy a new car until that situation is fixed. It may mean you drive your old car longer than you want to, but it will really help you in the long run.
Learn more about debt, spending, and saving
There are many websites that talk about debt, spending, and saving. As part of your self-assessment you should review these websites and see how some of their strategies for reducing debt and improving your savings could apply to you.
Perhaps, before going forward with getting an auto loan and buying a car, you should seriously look at your lifestyle, habits, and debt levels. You may decide to modify your purchase based on your findings, or decide that you can live without the car after all!