In the last years, more and more long auto loans have become very popular. It’s about making monthly repayments more affordable, but in the end you stack up a debt that you can not afford. Staggered auto loans rely on the fact that you can purchase a more expensive automotive model at a lower monthly cost. The end result is that people buy a more expensive car than they can afford and spend a lot more on interest than they would like. There has definitely been a boom in the long-term auto loan industry over the past decade, and that is almost troubling. The average car loan in 2015 was 72 months, compared with just 65 months in 2007. This increase has even exceeded mortgages, line of credit and credit cards. In the last 7 years, the auto loan industry has grown from $ 16.2 billion to $ 64 billion.
Negative impact and negative equity
Auto loans can have negative or positive equity. Negative equity occurs when you owe more than the value of the car and positive equity is the opposite. When you buy a new vehicle, its positive equity is at its highest since you have not made a payment yet and because the value of the vehicle is falling rapidly.
However, around the fourth year of a standard 60-month loan, you will fall into positive equity. This is a good position since you owe less than the value of the vehicle. The problem with long-term loans is that you quickly fall back into negative equity. The reason is that the value of your vehicle decreases faster than the speed at which you make your payments. You want to avoid that at all costs.
Separate the good from the bad
Auto loans are not all bad, but there is certainly a good and a bad way to manage them. The best gift you can make to yourself and your financial future is to put yourself in a position where you know what is going on and you will not be tempted to take a loan more staggered than necessary for the sole purpose of having lower monthly payments. The good news is that after reading this article, you will already be more informed than the majority of the population. Always remember to reimburse your vehicle during the given period and no longer.
Learn how to avoid auto debt
The truth is that most Canadians will have to borrow money at some point in their lives. The important thing is to avoid a car debt and not be seduced by debt-bonds that announce high-end vehicles at lower costs.
Buy only a vehicle that you can afford
Do not take a car loan for a car that will drive you into more debt. A 60-month loan is ideal. It is also normal to have negative equity at the beginning of your contract, but you have to convert it to positive equity towards the end of the contract.
Give a bigger down payment at the start
Ideally, when buying a new vehicle, you should give 20% of the total amount. The higher the down payment, the better.
Avoid long term loans
You are already aware of this but it is important to remember it. Most people are seduced by staggered loans to avoid making higher payments, but as mentioned, a shorter loan will save you more money in the end.
Do your research on your options
You may have decided on your car model. This is easy. You must also know which financing option to choose. Do your research and do not let the dealers persuade you to avoid certain financing options.
Pay off your vehicle as soon as possible
Once approved for a car loan, you must start paying it back as soon as possible. Here are some ways to make a car loan faster
Lump sum payments
Making lump sum payments as much as you can will allow you to repay your loan faster. These payments are not pre-established and can be made at the discretion of the borrower. In the end, you will pay less interest.
Increase your payments
Making higher monthly payments will reduce the duration of your car debt. The more you increase these payments, the faster your loan will be repaid. Ideally, your goal is to have a reliable and convenient vehicle as soon as possible. If you manage your finances well and increase your monthly payments, this goal is achievable sooner than you can imagine.
Go to a lower-end vehicle
One of the reasons for having refund problems can be your vehicle itself. If it’s too upscale, maybe it does not reflect your income. In this case, you could sell it or exchange it for a profitable vehicle. You could reduce your payments considerably. With a lower loan, you will be able to make regular monthly payments and thus repay your loan faster.
Your ultimate goal should be to improve your financial situation and pay off your car loan as quickly as possible. It should not exceed a certain period of time. Be realistic in your choice of car and, if possible, make lump sum payments as soon as your finances allow. If you follow this line of action, you will repay your car loan successfully.
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