3 Ways Car Loans Can Go Wrong — and How to Avoid Them

Photo by maxuser / Shutterstock.com

A new car loan can drive your credit ahead, cementing your reputation as a responsible borrower who can be trusted with major responsibility, including the much-coveted mortgage.

But take a wrong turn – even one late payment – and your credit score will sink, making it more difficult — and in some cases nearly impossible — to obtain credit in the future.

The time to guard against making such mistakes is before you sign a loan or even decide exactly which vehicle to buy.

So first consider these auto loan pitfalls to protect your credit. Then visit the Money Talks News Solutions Center, where you can search for car loan rates based on your needs and credit.

Unsure of your credit score? You should know it before applying for any type of loan, and you can get it for free from Credit Sesame.

1. Forgetting to factor in loan costs

While some advocate paying cash for vehicles, an auto loan is a great way to build credit — if it’s done right. Many auto buyers spend too much on loans because they look at the monthly payments, not the total cost of the car — including loan interest and finance charges.

Savvy borrowers shop for auto financing from credit unions, banks and other respected online lenders before they begin serious negotiations on a specific car. Knowing the total cost of your loan before signing on the dotted line is key to ensuring you don’t fall behind in payments or carry so much debt that lenders consider you a high risk.

2. Getting upside down on a loan

Long-term loans may make sense for those who can reasonably expect financial stability. But what if you buy a car based just on what you can pay 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.

“There is no silver bullet that will magically get rid of the negative equity,” write Edmunds senior consumer advice editors. “Your options are to deal with the situation either now or later.”

To help reduce your odds of getting upside down, follow the 20/4/10 rule suggested by Interest.com 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 principle, interest and insurance — exceed 10 percent of your gross income.

That way you’ll build credit without carrying an unwieldy amount of debt and have options if your financial situation changes.

3. Rolling over a loan without first doing the math

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, according to Edmunds. Incentives could reduce the balance on the existing loan or even erase the negative equity, but the tradeoffs may not be worth it for everyone.

Edmunds’ example: “If a person was $1,500 upside down on the trade-in car and wanted to buy a new car that had a $2,500 rebate, he or she could erase the negative equity and still have $1,000 for a down payment on the new car. Note, however, that cars with heavy incentives tend to have lower resale value for at least three years, according to Edmunds pricing analysts. This means you will be upside down for a longer period of time.”

What’s your experience with financing car purchases? Share with us in comments below or on our Facebook page.

How to find cheaper car insurance in minutes

Getting a better deal on car insurance doesn't have to be hard. You can have The Zebra, an insurance comparison site compare quotes in just a few minutes and find you the best rates. Consumers save an average of $368 per year, according to the site, so if you're ready to secure your new rate, get started now.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
7 Tips for Building an Emergency Stockpile
7 Tips for Building an Emergency Stockpile

A pandemic or natural disaster could leave you reliant on your existing food supply. Is your pantry prepared?

5 Ways Anyone Can Save on Out-of-Pocket Health Care Costs
5 Ways Anyone Can Save on Out-of-Pocket Health Care Costs

Here’s how to lower your health care costs without skimping on care.

9 Free Things That Used to Cost Us Money
9 Free Things That Used to Cost Us Money

Not everything is getting more expensive.

The 3 Biggest Regrets of Retirees — and How to Avoid Them
The 3 Biggest Regrets of Retirees — and How to Avoid Them

Rescuing a retirement from regret starts with these steps well before it’s time to quit working.

7 Deadly Health Mistakes People Make After Age 50
7 Deadly Health Mistakes People Make After Age 50

Simply avoiding these actions, or lack thereof, can improve the odds of a longer, more healthful life.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
This Gas Station Scam Is Victimizing More Drivers
This Gas Station Scam Is Victimizing More Drivers

For the second straight year, a growing number of Americans believe they’ve fallen prey to this scam.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

7 Unusual Ways to Declutter Your Home
7 Unusual Ways to Declutter Your Home

Tired of possessions weighing you down? Here are seven ways to declutter painlessly and effectively.

This Is the Most Popular Age for Claiming Social Security
This Is the Most Popular Age for Claiming Social Security

Both men and women are most likely to start receiving Social Security benefits at this age.

21 Things You Should Always Buy at a Dollar Store
21 Things You Should Always Buy at a Dollar Store

Dollar stores have great bargains on both everyday and occasional purchases.

6 Things You Should Never Buy at Trader Joe’s
6 Things You Should Never Buy at Trader Joe’s

We love Trader Joe’s for plenty of reasons. But think twice about this handful of products.

Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?
Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?

You could save more than $30,000 by setting aside these costly expenses for just one year.

Don’t Toss These 7 Household Items — Sell Them
Don’t Toss These 7 Household Items — Sell Them

Here’s how to earn cash as you give new life to these unwanted items.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have these documents that are crucial to their golden years — especially during a pandemic.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

Eat This Food If You Want to Avoid Alzheimer’s Disease
Eat This Food If You Want to Avoid Alzheimer’s Disease

One type of food associated with the Mediterranean diet offers especially large benefits.

5 Awesome Places You Can Retire Overseas on $2,000 a Month or Less
5 Awesome Places You Can Retire Overseas on $2,000 a Month or Less

In this week’s podcast: tips on retiring overseas — from someone who’s been helping American expats for decades.

11 Expenses That Quietly Drain Your Wallet
11 Expenses That Quietly Drain Your Wallet

It’s scandalously easy to overspend in these areas of your life.

9 Dumb Ways You Are Ruining Your Home Value
9 Dumb Ways You Are Ruining Your Home Value

Homeowners, beware these mistakes that can drive away potential buyers.

18 Amazon Purchases That We Are Loving Right Now
18 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

15 Outrageously Overpriced Products — and How to Save on Them
15 Outrageously Overpriced Products — and How to Save on Them

Retailers mark up products by hundreds of times their cost — but you don’t have to pay the premium.

Why Half of Retirees Now Owe Taxes on Social Security
Why Half of Retirees Now Owe Taxes on Social Security

Growing numbers of seniors are paying taxes on their Social Security benefits, but you might be able to avoid this fate.

10 Deep Discounts Available on Amazon This Friday
10 Deep Discounts Available on Amazon This Friday

These items are all steeply discounted — but the deals won’t last long.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.