Oops! Five Auto Loan Mistakes to Avoid

Buying a car is the second most important financial transaction in most people’s lives, right after buying a home. That’s why it’s vital to avoid auto loan mistakes and make smart choices right from the get-go.

Generally, the best idea is not to aim too high, or too soon. This can set you on the slippery slope to negative equity. That’s because a longer loan on a more expensive model can pump up your outstanding debt to a level that’s higher than the market resale value of your vehicle. High mileage and casual maintenance also contribute to this distressing situation.

Checklist for Avoiding Auto Loan Mistakes

A few hours of online research can save far-sighted buyers thousands of dollars over the next few years. So here’s a Don’t Do! list for Canadians dreaming of their next set of wheels.

1. Don’t roll over previous-car debt seems like a great way to keep up-to-date with automotive technology, right? While updating to a newer model might well lead to lower maintenance costs, trading a vehicle in too early simply shovels its debt on to the next loan, with snowball effects on repayments. In fact, more than 30% of Canadians trading in a car discover to the distress that they owe more on their auto loans than the trade-in value of their vehicles.
2. Don’t extend your car loan term can lock you into an agreement for close on a decade, or even more. More than 50% of car loans are taken out with seven-year financing in Canada today, with many ambitious buyers signing up for 96-month loans that keep monthly payments within their budgets. But so many things can change over such a long period – particularly job losses, family break-ups, and unforeseen medical expenses – while these binding contracts offer little wiggle room.
3. Don’t opt for the minimum down payment often feels like the fastest way of getting behind the wheel. However, this pumps up the end-price of your car. It forces you to take out larger auto loans and paying higher interest over a longer term. Instead, follow the 20-4-10, with a 20% (at least) down payment, and a four-year auto loan whose repayments are no more than 10% of your monthly income.
4. Don’t ignore the true cost of sub-prime auto loans can undermine your budget for years to come, through interest rates that may top a searing 15%. In actual figures, this can mean paying an additional $20,000 (or more) on a $35,000 car purchased under an apparently affordable nine-year vehicle financing agreement. This situation is more common than you might imagine: almost a quarter of Canadian auto loans fall into this sub-prime category.

Avoid these Auto Loan Mistakes through Smarter Decisions 

No matter how much you love its cool lines and comfortable interior, buying a model you can barely afford is never the smartest way of shuffling the kids around or commuting to work each day. Even lower-priced models are today fitted with many features that were the height of luxury just a few years ago.

Smaller and older models offer many advantages. In addition to lower prices and shorter auto loans at more affordable monthly rates, maintenance costs may be lighter.  At the same time, depreciation may be lower, particularly that notorious 20% drop in value when brand-new vehicles drive out of dealerships.

Auto Loan or Car Lease?

At a quick glance, leasing may be more appealing than buying, for some consumers. With no auto loans to pay off, these monthly payments simply offset differences between new and residual car values, plus finance charges.  However, car leases can easily turn into auto loan mistakes,

Usually lasting three to four years, auto leases may include mileage constraints. Additioally, other taxes and fees pump up monthly outlays. Furthermore, regular maintenance costs may be included, with a purchase option at the end of the term.

Takeaway

If you’re already juggling your monthly budget, be smart. You can avoid auto loan mistakes by putting those shiny new dream wheels on ice for a few more years. But if auto loan or lease payments fit seamlessly into your discretionary income, then go for it.  Yes, you can surely afford that car!