KNOXVILLE (WATE) – More than 17.5 million cars and trucks were sold last year and sales remain strong this year. The buying frenzy means a lot of people are looking for loans, but you should be careful and avoid a bad loan.
Your new car loan can drive your credit ahead, cementing your reputation as a responsible borrower. If you take a wrong turn – even one late payment – your credit score will sink, making future credit more difficult to obtain. Before you sign on the dotted line for that new, or new-to-you car, consider these loan pitfalls to protect your credit
The price of the car is plain to see – it’s posted on the windshield, right? It’s easy to end up paying more than you intended. Smart borrowers shop for auto financing from credit unions, banks and other respected online lenders before they begin serious negotiations on the exact car. Knowing the total of your purchase, including all extras and finance charges, is key to ensuring you don’t fall behind in payments.
Some loans just don’t make good financial sense and people spend too much on them because they look at the low monthly payments, not the total cost of the car, including interest on a loan over a certain number of years. A better bet is to follow the 20-4-10 rule. If possible, make a down payment of at least 20 percent, finance a car for no more than four years and don’t let your monthly vehicle expense, including principle, interest and insurance, exceed 10 percent of your gross income.
When you get a new car or a new-old one and you have to stretch your budget just to afford the payments on your current salary, what happens if you’re laid off and can no longer make the payments? You may need to sell your car even though it is worth less than you owe on the loan. That’s called being upside down on your loan. Alternatives include keeping your car at least until you reach a break-even point in the loan. You could also sell it and find a way to make up the difference on the loan.
What you want to avoid is having your car repossessed because your credit will take a major hit that might be irreparable for years to come.