Auto Loans: Don’t Dig A Money Pit In Your Garage

Choose the wrong auto loan and you might drastically increase

the chances of defaulting and losing your car. Find out

step-by-step how to avoid a money pit.

 

Car loans are certainly less costly than home mortgages,

student loans, or other kinds of loans. So why do so many

people end up defaulting and losing their cars? Find out these

hidden dangers:

 

Biggest Hidden Car Loan Danger: The Inherent Money Pit

 

Unlike home mortgages, student loans or other big-ticket loans,

car loans are inherently money pits. A house can build equity;

higher education can increase earning potential; even jewelry

can sometimes be re-sold for as much as was paid for it. If you

borrow to buy one of those things, you may eventually get a

return on investment. But every single car loses significant

value and keeps losing it as time goes by.

 

Solution: spend as little on your car as possible.

 

Of course, in order to spend as little as possible over the

life of the vehicle, you need to get a well-made,

fuel-efficient car, rather than the one with the lowest price

on the windshield.

 

But a pickup truck, SUV, sports car, or “luxury” model is a

guaranteed money-loser. Don’t worry about what other people

will think. Think about it: when was the last time you saw an

expensive automobile and thought, "I really like and respect

whoever owns that!"

 

The best buy? Many economists actually recommend buying a used

car that's a year or two old. That way you can actually benefit

from the fact that cars only drop in value. Even a car that’s

just six months old may offer you a substantial savings. Just

have it inspected thoroughly so you don't lose what you've

saved on maintenance payments.

 

Hidden Car Loans Danger: Dangerously High Monthly Payments

 

Unfortunately, most people never figure out the total cost

before signing on the dotted line. They end up staying up late

at night trying to figure out how to make ends meet. They live

in smaller houses. They skip going out at night. They don’t go

on vacation.

 

All that sacrifice to have a brand-new SUV in the driveway!

 

Take a hard look at your finances, and figure out how much you

can pay total each month for your car. Be sure to take into

account insurance, tax, maintenance, and fuel. Usually, when

people actually do calculate the total monthly cost of the car

they’re considering buying, they’re amazed by how high it is.

 

How Much Car Debt Can You Afford?

 

1) Make a list of your average monthly non-car expenses, and

subtract them from your earnings.

____your monthly after-income-tax income

-___any other taxes

-___housing (including any fees and property taxes, and

utilities)

-___food

-___health insurance or HMO

-___life insurance

-___debt payments

-___401 (k), IRA, or other long-term savings

-___short-term savings

-___telephone, cellular phone, cable, internet, etc.

-___entertainment and fun stuff (be honest!)

-___cost of yearly vacation(s) divided by 12

-___other expenses

 

= ____what you can spend on a car

 

2) Subtract your monthly car-related expenses from the amount

you have left over from your other expenses.

 

___What you can spend on a car (from above)

-___Amount you’re spending per month on gas (raise or lower

this figure depending on whether you are getting a car with

higher or lower gas mileage).

-___Monthly maintenance (remember: your new car won’t stay new

long, so maintenance will be an issue).

-___Monthly insurance (remember that for a new car, your

insurance premiums may go up).

-___Tax.

= ____ Maximum monthly loan payment.

 

Now plug the number above into a vehicle loan rate calculator

to figure out big of a car loan, and how much interest you can

afford.

 

Final Hidden Auto Loan Danger: Unnecessarily High Rates

 

If you simply take the first loan the dealer offers you, you

are probably paying too much. Do some comparison shopping on

the internet, and bring a list of the best loans with you when

you negotiate loan terms with the dealer.

 

Don’t let the dealer cheat you by shifting the cost from the

car loan to the car price to the deal on your trade-in. Make

sure you get a good deal overall.

 

Congratulations! You now are far better prepared to stay out of

an auto loan money pit than the vast majority of car buyers. Now

you’re ready to go shopping for a loan.

Joel Walsh is a regular contributor to
cars-auto-loans.com. Read his other articles, with even more
information on getting the best car loan.


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