Tag: Car Loans
When You’re About To Default On Your Car Payments
by admin on Jun.02, 2010, under Car Tips
When You’re About To Default On Your Car Payments
Even in a strong economy, millions of people struggle to make their car payments. Of course, the past twelve months have been dismal in the automotive industry. And with the economic environment growing darker each day, more people are losing their jobs and looking at their late-model vehicles as expensive liabilities. If you’re having trouble making timely car payments, you have alternatives. Today, I’ll explain the options available to you.
Working With Your Lender
When people fall behind on their auto loan, they often choose to avoid the lender. That’s a mistake. Not only does the lack of communication frustrate the lender, but it effectively eliminates your chance of working with them. For example, they might be willing to defer your next payment. The lender will want to know the details of your situation, including why you’re falling behind and your current credit score. Be open with them. They can often help you bring your account current.
Refinancing Your Auto Loan
Interest rates have dropped significantly over the past year. Most people think of a decline in interest rates in the context of refinancing their homes. You can just as easily refinance your auto loan. If your credit score is reasonably good, there are plenty of companies that will help you refinance the terms of your loan to lower your monthly payments.
It’s also worth noting that higher interest rates can often have the same effect on the amount you need to pay each month. That’s due to some lenders being willing to stretch the terms of your loan over a longer period of time. It’s more expensive over the long run, but you’ll end up with lower – and perhaps more manageable – monthly payments.
Selling Your Vehicle
You can also sell your car if you’re falling behind. However, this requires some clarification. Even though you drive your vehicle off the dealership lot, you don’t actually own it. The title rests with the dealer. In order to sell your car, you need to transfer the title. The only way to do that is by paying off your current auto loan.
Sometimes, given your situation, the value of your car will exceed the amount you owe. If that’s the case, it’s a simple transaction; sell the vehicle to the new buyer and use the money to pay the lender. The title can then be transferred to the buyer. On the other hand, if your vehicle’s value is below the amount you owe the lender, selling it leaves a deficit. You’ll need to make up the difference before the title can be transferred to the buyer.
You’ll notice the option that I’ve neglected to mention is allowing your vehicle to be repossessed. That is always a mistake. It will damage your credit and impact your ability to get an auto loan with a competitive rate in the future. Remember, you have plenty of options if you’re falling behind on your car payments. The key is taking action to resolve the problem as quickly as possible.
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Is Your Car Loan Upside Down?
by admin on Dec.15, 2008, under Car Tips
Is Your Car Loan Upside Down?
A lot of people have heard about homeowners going “upside down” in their mortgages. They don’t realize that it can happen with car loans just as easily. In fact, because houses tend to appreciate in value over time while the value of your car tends to go south, it’s more prevalent with auto financing. In essence, it means that the amount of money you owe is greater than the value of your vehicle. Today, I’ll explain how it happens. I’ll also provide a few tips that will help you avoid going upside down in your next car loan.
How Auto Financing Goes Awry
To illustrate how your auto financing can go upside down, I’ll use a hypothetical example. Let’s say you’re buying an SUV and it costs $40,000. You put a down payment on it of $5,000 and carry the rest ($35,000) on a 5-year term. After 3 years, you’re tired of driving your SUV and want to sell it. Unfortunately, it’s only worth $20,000, despite your owe $24,000 on the financing. You are officially upside down. That means if you want to sell the SUV, you’re going to have to come up with another $4,000.
If it’s any consolation, this happens to a lot of people. It’s due to your vehicle’s depreciation.
The Impact Of Depreciation
You probably already know that most vehicles lose about half of their value through depreciation over the first 3 years. Now, keep in mind that the amortization of your loan happens for the entire life of the term (5 years in our example). The problem is that your SUV depreciates at a quicker pace than the amortization over the first 36 months. After those 3 years pass, the depreciation slows down. That allows the amortization to “catch up,” bringing your financing back into a “positive equity” position.
How To Avoid Taking A Bath
First, realize that carrying an auto loan with negative equity (in other words, owing more than the car is worth) won’t have any effect on your credit. So, that shouldn’t be a concern. Second, understand that the longer you stretch out the period over which you finance your vehicle, the longer it’ll take for the amortization to catch up with the rate of depreciation. That means you’ll be in the negative position longer with a 5-year term than you will with a 4-year term.
To avoid getting caught owing more than your vehicle is worth, put a larger down payment on it. Then, plan to keep driving it through the entire term instead of immediately selling after 3 years. Remember, the depreciation is what turns the loan upside down. If you’re absolutely sure you’re going to sell your car before you’ve paid off the financing, shorten the term to 4 years.