3 Ways Auto Loans Can Go Wrong – And How To Avoid Them


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A new car loan can advance your credit, cementing your reputation as a responsible borrower who can be given major responsibilities, including the coveted mortgage.

But take a wrong turn – even one late payment – and your credit score will plummet, making it harder – and in some cases almost impossible – to get credit in the future.

It’s time to guard against such mistakes before signing a loan or even deciding exactly which vehicle to buy.

So first consider these auto loan pitfalls to protect your credit. Next, visit the Money Talks News Solutions Center, where you can search for auto loan rates based on your needs and credit.

Unsure of your credit score? You should know this before applying for any type of loan, and you can get it for free from Credit Sésame.

1. Forgetting to factor in borrowing costs

While some advocate paying cash for vehicles, a car loan is a great way to build credit, if done right. Many car buyers overspend on loans because they look at the monthly payments, not the total cost of the car, including loan interest and finance charges.

Savvy borrowers seek auto financing from respected credit unions, banks, and other online lenders before entering into serious negotiations on a specific car. Knowing the total cost of your loan before signing on the dotted line is essential to ensure that you don’t fall behind on payments or have so much debt that lenders see you as high risk.

2. Get upside down on a loan

Long-term loans can be meaningful to those who can reasonably expect financial stability. But what if you buy a car just on the basis of what you can afford with your current salary and then get laid off? You may have to sell your car even if it has depreciated and is worth less than what you owe on the loan. This is called being upside down on your loan.

“There is no silver bullet that will magically eliminate negative equity,” write Edmunds consumer advice editors. “Your options are to deal with the situation now or later. “

To help reduce your chances of having your head down, follow the 4/20/10 rule. suggested by Interest.com and others:

  • Make a down payment of at least 20 percent.
  • Finance a car for no more than four years.
  • Don’t let your monthly vehicle expenses, including principal, interest, and insurance, exceed 10% of your gross income.

This way, you will build up credit without having to go into debt for too long, and you will have options if your financial situation changes.

3. Renew a loan without doing the math first

A common method of dealing with negative equity is to buy another car and finance it by incorporating the amount currently held into the new loan, according to Edmunds. The incentives could reduce the existing loan balance or even wipe out negative equity, but the tradeoffs may not be worth it for everyone.

Example from Edmunds: “If a person had $ 1,500 upside down on the trade-in car and wanted to buy a new car with a $ 2,500 discount, they could erase negative equity and still have $ 1,000. for a deposit on the new car. Note, however, that cars with strong incentives tend to have lower resale value for at least three years, according to pricing analysts at Edmunds. This means that you will be upside down for a longer period of time.

What is your experience with financing car purchases? Share with us in the comments below or on our Facebook page.

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