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How to Avoid Car Loan Debt

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How to Avoid Car Loan Debt

Written by Caitlin Wood

How to Avoid Car Loan Debt


Car Financing Car Loan

In recent years the trend towards longer and longer car loans has become more and more popular. It’s the  idea that you’re monthly payments will be more affordable, but in the long run and something that many people do not consider, you’ll be piling on debt you can’t afford. Longer car loans are typically advertised as a means to get a nicer and more expensive car at a more affordable month cost. The end result is that people usually end up buying more car than they can afford and spend more on interest than they’d like.

There definitely has been a growth in long-term car loans in the past decade that could be considered troubling. The average car loan term in 2015 was 72 months, compared to only 65 months in 2010. Auto lending is an ever growing market, 20% every year since 2007 to be exact. Its growth has even exceeded mortgages, lines of credit and credit cards. In the past seven years, the vehicle loan industry has grown from $16.2 billion to $64 billion.

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The Negative Impact of Negative Equity

Car loans can have negative equity and positive equity. Negative equity is when you owe more on the car than it’s worth and positive equity is the opposite. When you first get your car your negative equity is at the highest because you haven’t made any payments yet and because cars depreciate in value so quickly.

However, by around the fourth year of a standard 60 month loan, you will move into a positive equity position. This is a great place to be as you owe less than the car is worth. The thing about long term car loans is that your equity loops back into being in a negative. The reason for this is because your car continues to depreciate in value but you’re not paying it off quickly enough. This is without a doubt something that you want to avoid.

Separating the Good from the Bad

This is not to say that all car loans are bad, but there certainly is a right way and a wrong way to go about doing them. The best thing you can do for yourself and your future finances is to put yourself in a position where you know exactly what’s going on and you won’t be tempted into taking on a longer loan term just to decrease your monthly payments. The great news is that after reading this article you’re already on your way to being significantly more informed than a large portion of the population. Always remember: aim to pay off your car in 65 months and not longer.

Learning How to Avoid Car Loan Debt

The simple truth is that most Canadians will have to borrow money at some point in their lives.  What is important is that you don’t get seduced by debt traps that advertise high-end vehicles with alluring low-cost options. These pointers should keep you on the right track to avoiding car loan debt.

Only buy a car you can afford

Don’t take out a loan on a car that will put you even further in debt down the road. Always remember that a 60 month loan is ideal. Also keep in mind, it’s normal to have negative equity at the beginning of your loan, but you want that to convert to positive equity by the end.

Put more cash down up front

Ideally, you should aim to put down 20% when you`re buying a new car. The more you’re able to put down the better.

Avoid long-term financing

This point has already been made but it’s worth repeating. Most people are seduced by the longer terms because they want to avoid making larger payments but as we`ve discussed, a shorter term means you’ll be saving money in the long run.

Experiment with financing options

You may have finally decided exactly which car you want.That’s the easy part. You also need to know exactly which financing option you should choose. Do your own research and don`t allow the car dealer to persuade you away from certain financing options.

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Paying off your Car Loan ASAP

Once you have been approved for a car loan, the next step is to start paying it off as soon as you can. Here are a few different ways you can speed up your auto loan repayment.

Lump Sum Payments

Making lump sum payments whenever you have the opportunity will allow you to pay off your loan more quickly. These payments are not totally set, and can be made at the convenience of the borrower. In the long run, you’ll end up paying less interest.

Increasing Your Payments

Making larger monthly payments will reduce the length of your auto loan debt. The more you increase your monthly payments, the more you are speeding up the paying off process. Ultimately your goal is to own a reliable and convenient vehicle out right. If you manage your finances well and raise your monthly payments, this goal can become a reality sooner than later.

Downsizing Your Vehicle

There is also the possibility that the reason you`re having trouble with repayments is not your loan, but the car itself. If the size of your loan is too big, to the point where you can’t pay it off, then it`s possible your car is not reflective of your income. If this is the case, you may want to consider either selling or trading in your car for something more cost-efficient. This move will significantly reduce your monthly payments. With a smaller loan, you will be able to make consistent payments and pay off your loan far more quickly.

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The Bottom Line

In the end, improving your financial position and paying off your car loan as quickly and effectively as possible should be your primary concern. Always keep in mind that your auto loan should not exceed a certain time commitment, be realistic with your car choice, and, if possible, make lump sum payments whenever some extra cash frees up.  If you follow these basic guidelines you’ll be on the right track to successfully paying off your auto loan.

Looking for More Information on Auto Financing in Canada?

In you’re currently looking into purchasing a new car or are interested in more information on auto financing take a look at our online application.

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