Rebecca Bernard
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We Need To Change How We Think About Car Financing

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woman car shopping buying leasing at car dealership keys

This past spring, I made the biggest purchase of my life by buying a certified pre-owned vehicle, and I signed on for a decently-sized five-year loan to pay for it. It was a big decision for me, and I was definitely freaking out when I signed the papers, but I had worked out that I could make the payments religiously without being overburdened by their size. If all goes as expected (knock on wood), I will pay off my loan as soon as possible and then continue to drive my vehicle payment-free for as long as I can.

However, it seems like my position is becoming rarer in the car world. While I plan on having my car paid off before I would even consider purchasing a new vehicle (unless there was some sort of reason why I had to buy earlier), more and more car buyers are buying cars while they still owe more than their current car is worth. In car terms, these buyers are underwater.

Drivers can still make a purchase, but the amount they still owe after a car is traded in on their old loan is then often rolled into the car loan for the new vehicle. Jalopnik reports that a study conducted by Edmunds has estimated that about 32% of car buyers are in this situation when they buy a new vehicle. This might not seem like a very high percentage, until you consider that is a record. Even in 2006, during the housing boom right before the recession, only 29.2% of car buyers were underwater, or had negative equity in a car. This cycle of debt can make it very difficult for a consumer to ever have the means to get out from under the debt, and could cost them more money in the long run.

The current financing trend is being blamed on record low interest rates on loans, and initiatives by lending institutions and manufacturers to extend a loan period beyond what is best in the interest of low monthly payments.

To avoid a situation like this, Jalopnik states that it’s very important for car buyers to actually make sure they can afford the vehicle they are purchasing. Figure how much you can pay monthly on a car loan, and then do some multiplication to figure out how large of a loan you can afford to take out. Try to figure on a car loan for about five years so that you can earn equity in a vehicle faster. Another big help in keeping the cost of a car lower and hopefully keep your head above water is to save up more cash for a larger down payment on a vehicle to make the starting cost of a loan smaller than before. While buying the biggest car will all the bells and whistles on the lot might sound like a good idea at the time, your bank account will thank you for buying a car more within your means.

News Source: Jalopnik