What to Keep in Mind Before Taking Up That Car Loan
Spring is typically car shopping season, so before you buy, there are a few things that you should take into consideration.
“Avoid buying more car than you can reasonably afford in the short term. Car loans are tricky because cars are depreciating assets and the loans are often extended over a long period of time to make payments more ‘affordable’. This can create debt problems, because the minute you drive the car off the lot, the car is worth less than you paid,” says Jeff Schwartz, Executive Director, Consolidated Credit Counseling Services of Canada.
Here are some tips to help you avoid debt problems when buying a car.
Do your research
Before you even hit the car lots, spend time researching different cars. Look at things like prices, how long different cars hold their value, resale potential and consumer reviews about ongoing maintenance and repairs.
“In order to make a responsible decision, it’s a good idea to fully understand what cars cost so that you don’t overpay in the moment. You also need to have an idea about how much it is likely to cost you to maintain them over time, so you don’t end up with more debt. It’s important to factor those costs into your purchase decision,” says Schwartz.
Set your budget and your timeline
Car loans seem affordable because they are often extended out over several years (in some cases up to 8 years or more). It’s important that you think of your car loan in the long term, beyond your monthly payment.
Don’t forget that the value of your car will decline quickly, which means that you need to keep your timeline on the shorter side. Determine what payments you can reasonably afford for 48 months or less and use that as your budget for your car purchase.
Even though a car may seem like a great deal in the moment, is it still going to suit you a few years down the road? If your car is paid off or has a low balance on it, then you can trade it in. However, let’s say you’ve got a two-door car and in a few years, you have a family that requires more space. If you’ve extended your loan over a long period of time, you may be in a negative equity position. You’ll either be unable to trade the car in at all, depending on the terms of your loan, or looking at selling it and taking out even more debt to buy another car.
That’s why you need to assess a car not in terms of how it will suit you today, but how it will suit your needs tomorrow as well.
Reduce your debt
Another way to avoid debt problems with a car purchase is to reduce the amount of debt you need to take out. One option is to increase your down payment. Another idea is to buy used. You are paying a premium for a new car and can get many of the same features and benefits for far less money if you buy used.