How to keep your car loan from going bad

KNOXVILLE (WATE) – If you’re in the market for a new car, used or new, there are some things to know before you sign the dotted line. Guarding against mistakes before you sign that loan can save you a lot of headaches in the long run.

A new car loan can drive your credit ahead, cementing your reputation as a responsible borrower. But if you take a wrong turn, even one late payment, your credit score will sink, making it more difficult to obtain credit in the future. To help guard against making mistakes before you sign a loan, first consider these loan pitfalls to protect your credit.

When you buy a car, add all the costs. Some people spend too much time looking only at the monthly payments, not the total costs which includes interest and finance charges. Savvy borrowers shop for auto financing from credit unions, banks and other respected lenders before they begin serious negotiations.

Knowing the total cost of your loan before signing is key to ensuring you don’t fall behind in payments. Those 5- to 7-year-long term loans may make sense for those who can reasonably expect financial stability, but what if you buy a car based on your current salary, and then you’re laid off? You may need to sell your car, even though it has depreciated and is worth less than you owe on the loan. That’s called being upside down on your loan.

To help reduce your odds of getting upside down, follow the 20-4-10 rule suggested by and others. Make a down payment of at least 20 percent. Finance a car for no more than four years. Don’t let your monthly vehicle expense, including principal, interest and insurance, exceed 10 percent of your gross income.

A common method for dealing with negative equity is to buy another car, and finance it by rolling the amount currently owned into the new loan. Incentives could reduce the balance on the existing loan, but the trade offs may not be worth it for everyone. According to car experts at Edmunds, vehicles with heavy incentives tend to have lower resale value for at least three years. This means you will be upside down for a longer period of time and you don’t want that.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s