Auto Loans: Don't Dig a Money Pit in Your Garage
Written by: Joel Walsh
Carloans 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.
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.
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.
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!"
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!
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)
-___health insurance or HMO
-___401 (k), IRA, or other long-term savings
-___telephone, cellular phone, cable, internet, etc.
-___entertainment and fun stuff (be honest!)
-___cost of yearly vacation(s) divided by 12
= ____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)
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).
= ____ 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.
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
Congratulations! You now are far better
prepared to stay out of an auto loan money pit than the vast majority
of car buyers.
Joel Walsh is a regular contributor.
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