Choose the wrong auto loan and you might drastically increase the chances of defaulting and losing your auto. Find out step-by-step how to avoid a money pit.
Auto 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 autos? Find out these hidden dangers:
Biggest Hidden auto Loan Danger: The Inherent Money Pit
Unlike home mortgages, student loans or other big-ticket loans, auto 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 auto loses significant value and keeps losing it as time goes by.
Choose the wrong auto loan and you might drastically increase the chances of defaulting and losing your auto. Find out step-by-step how to avoid a money pit.
auto 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 autos? Find out these hidden dangers:
Biggest Hidden auto Loan Danger: The Inherent Money Pit
Unlike home mortgages, student loans or other big-ticket loans, auto 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 auto loses significant value and keeps losing it as time goes by.
Solution: spend as little on your auto 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 auto, rather than the one with the lowest price on the windshield.
But a pickup truck, SUV, sports auto, 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 auto that's a year or two old. That way you can actually benefit from the fact that autos only drop in value. Even a auto 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 auto 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 auto. Be sure to take into account insurance, tax, maintenance, and fuel. Usually, when people actually do calculate the total monthly cost of the auto they're considering buying, they're amazed by how high it is.
How Much auto Debt Can You Afford?
1) Make a list of your average monthly non-auto 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 auto
2) Subtract your monthly auto-related expenses from the amount you have left over from your other expenses.
___What you can spend on a auto (from above)
-___Amount you're spending per month on gas (raise or lower this figure depending on whether you are getting a auto with higher or lower gas mileage).
-___Monthly maintenance (remember: your new auto won't stay new long, so maintenance will be an issue).
-___Monthly insurance (remember that for a new auto, 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 auto 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 auto loan to the auto 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 auto buyers.
