Car loans from hell: How to avoid the traps
With record car sales and more car loans to choose from, Jack Han warns of the traps when picking a car loan.
March 10, 2010
From January 2009 compared to January 2010, car sales have jumped 15.6 percent. With this jump in demand, lenders are becoming increasingly competitive in a bid to capture the market.
Whilst there are some great promotional deals on the market, there are some precautions you can take to avoid being stuck with the car loan from hell.
Let’s take for example Caitlin, who has just borrowed $10,000 to finance a car purchase. On a rate of 9 percent for 5 years, Caitlin is expecting to pay $2455 in interest over the life of her loan.
However, several things have gone wrong with her seemingly affordable loan. Firstly, Caitlin discovers that the advertised rate was only for buyers of new cars, so when she purchases a used car, her loan suddenly jumped to an interest rate of 13 percent. This ends up costing her $3,652 in interest – over $1,000 more in interest charges.
Caitlin then decides to take a holiday, and wishes to defer her repayments for a year. However, she finds that she isn’t able to defer her monthly repayments, and that each missed payment has cost her $50, to a sum of $600.
Frustrated by her loan, Caitlin decides to repay her debt in full as soon as possible. When she does this, she is slapped with an early repayment penalty fee of $300.
With a few fees and changes, Caitlin has ended up paying $2,000 more than she had expected on a loan of only $10,000.
There are a number of factors to consider when choosing a car loan to make sure you aren’t duped with dud loan.
- Car dealers often try to persuade you to take up a car loan through them. This may not be the cheapest option because they charge a commission above what they finance from lenders.
- Cars depreciate almost half of their value within the first few years of purchase, so it’s important to avoid dragging out your loan for much longer, or else you will owe more debt than the worth of your car. Always choose short-term loans to reduce the interest you accrue throughout the years.
- Dealers sometimes offer a choice between a cash rebate and a lower interest for your loan when you purchase your car. Taking the extra time to calculate how much you will save in the long run can often save you hundreds.
Before you fall in love with the display car, shop around online and compare car loans by price and features to protect yourself from traps that could cost you thousands. When it comes to your new car, be tough with lenders and dealers, because nothing should spoil your drive.
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