Are You Ready for Auto Loan Debt?

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Written by Guest | Last Updated November 6th, 2019
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The return of cheap credit has been a huge benefit to North American car buyers. More auto loans than ever are being secured for long-term contracts in order to keep payments steady and predictable. Car dealers and lenders are offering longer-term loan amortization, underwriting even up to 96-month policies. Lenders are putting themselves at a disadvantage due to the length of time consumers are choosing to pay their leases or loans before they purchase a new car. For the buyer, however, less interest is being paid to interest. Buyers are more intent on getting the car than they are in the amount they'll end up paying. Before you jump into ownership, remember that there are a number of issues that can develop over the life of your auto loan.

Develop an Appreciation for Depreciation

Even in the best situation, no one can account for the depreciation of the value of your vehicle. When you're selecting the particular make and model you wish to purchase or lease, examine the statistics that describe its rate of depreciation. Generally a car loses 10% of its value in the first year and 15% in its second. However, this will vary depending on the resale value associated with the vehicle. For years, certain manufacturers declined to allow leasing options on their vehicles because the depreciation was so high that there was no benefit to buying the car back at the termination of the lease. Ownership has its own perils. When you try to recoup some of your investment, you may be surprised to find that your car's value is not what you had hoped it would be.

Develop an Interest in Interest

After 2001, lenders offered a proliferation of sub-prime credit options to borrowers. This enticed many people to buy vehicles even though they had not intended to do so, which leads to problems later on during the repayment period. Even though interest rates are desirably low, they still exist and must be paid on top of the principle cost of the vehicle. Before you walk into a dealership and feel the strong arm of sales tactics, remember that you are responsible for each payment, every month, for the duration of the term. What may seem like a good deal now may become a crippling and ongoing debt problem over time. Long-term payment schedules are attractive but they also leave a borrower exposed to debt management risk.

Auto Loan Debt Can Actually Be Good

Believe it or not, having auto loan debt may actually improve your credit score. A car loan is a low-interest credit commitment and, therefore, is an easy way to create a history of debt management. The key here is to put down as much as possible as part of the initial down payment in order to stave off the heftier interest rates that come from long-term lending. The faster you pay off your debt, the better your credit will appear to lenders and credit bureaus.

Auto loan debt has been on the rise over the past 15 years. While low interest rates and minimal down payments make owning or leasing a car more attractive, you need to be aware of the responsibility that comes from ownership and debt management. Now is the time to consider your financial situation. You can always get the car of your dreams in a few years, or even now, as long as you have a financial plan in place to handle future payments.

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