Don’t Get Buried in Car Debt

Even with low auto finance rates, some consumers get over their heads in car debt. Here are some tips on how to avoid this situation.

The Dangers of Longer-Term Loans

On their quest for low auto finance rates, some consumers are lured into the trap of excessively long-term car loans. Some loans can have terms as long as 72 months, which will cost you an arm and a leg in interest expense. Most experts advise keeping your loan terms within 36 months. Here is why:

1. Long-term loans do not usually have low auto finance rates
2. Though your payments are lower, the payment is composed of more interest
3. You will pay substantially more interest over the life of the loan
4. You risk becoming upside down in the loan (owing more than the car is worth)

What You Can Do

We’ve compiled a list of proven strategies to help you avoid getting buried in car debt.

1. Pre-qualify. Pre-qualifying can help you get low auto finance rates.
2. Think about home equity. The car loans with the most competitive low auto finance rates are usually home equity loans.
3. Crunch the numbers. The best way to gauge the competitiveness of your low auto finance rates is to ask the lender your APR (annual percentage rate) and the total cost of the loan, meaning the sum of all of your payments, interest expense, and fees.
4. Boost your down payment. The larger your down payment, the better your chances are of getting low auto finance rates. This will also help you avoid owing more on your car than it is worth within months after you buy it.
5. Stick with what you can afford. Don’t let deceptively low monthly payments trick you into buying more car than you can afford. Low auto finance rates won’t help you if you are buying a car that is beyond your means.
6. Check the fine print. Just as you would with any loan, read the fine print thoroughly before you sign any agreements. Check the terms, rates, and conditions of your loan. Also pay close attention to any prepayment penalties the lender might charge. Ask your lender if you have any questions before you sign. Examine key questions to ask before you commit on the next page.