auto

Should I avoid auto loan debt?

Whether it is credit cards, home loans or car loans, borrowing money is a way of life for most people. Credit scores, which play a huge role in the credibility of consumers, wouldn't even exist without the borrowing of money. Even though debt is commonplace, it can leave you struggling for years, or even a lifetime. Still, many people continue to borrow money to purchase vehicles, regardless of their financial well-being. Auto loan debt is significant in borrowers young and old.

A common auto loan scenario

You probably see advertisements offering great "deals" on vehicles every day. These deals are often debt traps, colored by enticing low-cost options for high-quality vehicles.

Suppose a local car dealership is offering you zero down and a monthly payment of $425 for a brand-new car worth $30,000. You think $425 per month is reasonable, so you take the plunge. It's a six-year contract with a 7 percent annual interest rate. The deal might seem worth it when you are test-driving the car, but it will come back to haunt you later.

Six years from the purchase date, you will have spent more than $2,500 extra on the car. If you sell the car before the term is up, you will probably be "upside down" in the deal, owing more than the car is even worth. According to Edmunds.com, a quarter of Americans are facing similar upside down situations every day. Once you are upside down, it's hard to get right side up.

The Golden Rule: Don't buy a car you can't afford. If you can master this rule, you will be able to buy your dream car when the time is right. Regrettably, you might have to buy a clunker until you save enough cash for a better vehicle.

Put more cash down. You should aim to put 20 percent down when you buy a new vehicle. If you can pay more, do it! Your goal is to pay with cash.

Get rid of long-term financing. Shorter terms might equal larger payments, but it will actually save you money down the line.

Research before you test-drive. You may know exactly what car you want, but you should also know exactly what the car salesman is saying when you are ready to buy. Use Bankrate.com's auto loan calculator to experiment with financing options.

Get rid of auto loan debt as soon as possible. If you have extra cash, and your financing plan allows you to pay down more per month without penalties, pay down as much as you can on your auto loan debt. The faster it is gone, the less interest you will have to pay. You can also read these auto debt tips on Bankrate.com for more ideas.

The bottom line: Try to avoid debt, regardless of the short-term payoffs.

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