Long loan terms might come off as attractive and a great deal, longer payment terms means a smaller monthly payment, which means you can afford a better car, or save tons of money, right? Wrong. This is a major illusion and if you are not careful and get carried away in your daydream, you could end up under water on a vehicle you have not even driven yet. Keep your eyes and ears open when you are shopping around car loans and avoid the pitfalls associated with long loan terms. But what happens if this advice is too little too late? All is not lost, there are some strategies you can implement to get back on your feet if you are stuck in the negative equity cycle of a long-term auto loan.
Refinancing a Bad Loan
All is not lost if you have already signed on the dotted line, assuming your credit is good, you might be able to refinance your auto loan in order to save money. An auto loan refinance calculator is going to come in handy at this stage because it is a low risk, no-commitment way to play around with numbers, and see what you might be up against when you are trying to find the best lenders. This calculator is going to consider your credit score and loan balance and provide you with an estimated total for your refinanced loan. Refinancing can also help you avoid defaulting or running into any fine-print penalties that exist in your current contract.
Balance Your Budget
Ideally, when taking out an auto loan, either privately or through a dealership, you should be searching for the shortest length loan coupled with a monthly payment you can afford. Creating equity in your vehicle means that you have the freedom to trade or sell at any time and have it be profitable to you, instead of costing you money in penalties, or getting stuck paying down a loan on a car that has already exceeded the value of the vehicle. Recognize how long loan terms can create a false reality for you as a consumer, $300 a month is not apples to apples, you have to educate yourself on what the $300 is allocated towards and what you will be left with once the loan is paid off when determining how much of your budget can be realistically allocated towards your car.
Focus on Hidden Costs
It is important to feel satisfied with your original interest rate when signing your auto loan but understand that interest rates can increase past a certain point with loan terms that exceed 60 months. Not only will this impact your monthly payment, but it also means that you will be paying more in total by the time to loan period ends. Another considerably hidden pitfall of this style of loan, is simply the costs associated with maintaining the vehicle will also last the life of the loan. Meaning that not only will you end up having paid the lender more than the car is worth, you could have also paid out unnecessary costs on maintenance items that you may have been able to avoid with a shorter loan.