More people than ever before are taking out loans to finance a car, and according to financial experts, it could be causing a significant problem. The number of ‘subprime’ auto loans given out is increasing, and many people are worried that it is unsustainable, in the same way, that subprime mortgages caused so many problems back in 2008.
So, as someone who needs a car but doesn’t want to get into financial issues in the future, what are you going to do? We’re going to take a look at a few things you need to consider before taking out a car loan, to ensure you don’t end up in a precarious financial position.Let’s get started with some of the basics.
What’s the problem?
The major issue about car loans is that because of the interest you need to pay, there will almost always be a time when your loan is more than the value of the car. And if you are involved in an accident or your car is stolen, you will end up owing the difference. That could end up being a lot of money, depending on how much of the loan you have paid back – and some households have been financially crippled as a result.
Who is at risk?
Everyone who buys a new car with borrowed money is in danger in some respect. When you take out car title loans on a new vehicle, the second you drive your new wheels out of the store, it is likely your finances will be ‘upside down’ for a little while at least – due to depreciation. And, depending on the level of interest involved, it could take a long time to get straight.
What can I do?
The first thing to consider when buying a car is to look for a model that holds its value. A thorough understanding of depreciation in required, too – a slower depreciation means less time in the ‘upside down’ zone. You can get a good idea of depreciation by looking at the ‘car ownership’ lists on independent car info services like the Kelley Blue Book.
What about taxes?
If you can pay any taxes and fees outright, it will put you at a much bigger advantage than if you do not. Don’t forget, these fees are on top of the price of the car, so are additional – and the more you pay off, the less upside down your loan will be. The idea is only to borrow enough money to pay for the value of the car, not all the extras.
Should I make a down payment?
There is almost no occasion when making a significant down payment won’t be better for your finances. The depreciation of your car is often at its greatest during the first year so the value of your vehicle will be markedly different on Day 365 as it was on Day 1. The more you can contribute towards slimming down that margin, the quicker you will take your loan out of the subprime territory. As a rule, you should try and put something like 20-25% down, which should account for much of the interest, some of the car itself, and the taxes and fees. Struggling to find some savings? Try using your old car as a trade-in, and you can put that towards a down payment.
Be clever about loan length
When you apply for a loan, always try and estimate how long you will be keeping the car. There is no accounting for thieves and accidents, of course, but as a rule, if you plan on owning the car for two years, make sure your loan length is no longer than that. If you sell your vehicle before you have paid it off, the chances are that the loan will be rolled into your next loan, making that one even more expensive.
Savvy about interest
Ultimately, the rate of interest on your loan will determine the length of time you spend with an upside down loan. It’s also relevant to point out that the closer to the manufacturer your loan, the more likely it will to be cheaper. Many manufacturers offer cut-price financing deals, for example, and you might also be able to pick up a deal from your local credit union or cooperative.
If you buy any car with borrowed money, it is more than likely your loan will be upside down at some point. The trick is to ensure that period of time is as small as possible. Happy buying!