Wednesday, March 26, 2008

Automobile Loans

One of the most common things to borrow money for is an automobile. Low interest rates make it very easy to afford monthly payments on a new car, but what is the best strategy for someone looking to get out of debt quickly.

New cars depreciate very fast. This means that once you purchase the car the maximum amount you could sell it for will be significantly less than the amount you financed. New cars lose a great deal of their value once you drive them off the dealers lot. Because of this it is usually unwise to think of your car as an investment.

Generally it is much more cost effective to buy a used car. Someone else has taken the biggest loss from depreciation, so you will be able to recover much more of your original purchase price when you later sell the car.

If you are financing your vehicle be sure to think practically about the terms of the loan. If you get 5 year financing on a car that you think will last you 3 years, you may lose a good deal of money. However, many times you can find excellent rates on car loans. Sometimes dealers even have 0% interest just to let them move more inventory. In this type of situation, financing your car may give you more free money to pay off higher interest credit to help you get out of debt more rapidly.

Be careful about getting a debt consolidation loan that includes your vehicle. While this can be a good strategy, it can also cause problems. If you take out a 30 year consolidation loan to pay for your 2 year old automobile you will probably be paying on the vehicle long after it is gone. Worse yet, you’ll be paying interest on it years after you’ve sold it.

If you are using consolidation to get out of debt quickly, you may be able to use the new consolidation loan to let you pay more on the principle that you owe. Just make sure that you avoid getting into a situation where 15 years later, you are paying on 2 or 3 vehicles that you no longer own. The lower payments of a consolidation loan are nice, but not if they will put you in a constrained financial position in the future.

Debt consolidation is something that you need to approach from a long term perspective as part of a debt reduction plan. If you try to use debt consolidation as a short term fix for credit problems you will regret it later.

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