When shopping, consider whether you really can afford the model you want to buy. If it’s necessary to take out a six-year loan to afford the monthly payment, it may be wise to choose a less expensive ride.
A rule of thumb is 20-4-10: Put at least 20 percent down in the form of cash or a trade-in, finance the car with a loan of no more than four years and make sure the monthly expenses, including the car payment and insurance costs, are no more than 10 percent of your gross income. If you can’t abide by that rule, “then you can’t afford the car.”
Here are some tips on how to minimize the chance of being upside down in a car loan:
- Make a large down payment. The larger your down payment, the smaller your loan amount and the less interest you’ll pay. Aim to make a down payment of at least 20% of the purchase price of the car.
- Choose a short loan term. A shorter loan term means you’ll pay off the loan faster and build equity in the car more quickly. However, it also means higher monthly payments. Choose a loan term that you can afford, but don’t go longer than 48 months.
- Get pre-approved for a loan before you start shopping for a car. This will give you an idea of how much you can afford to spend and will help you avoid overpaying for a car.
- Shop around for the best interest rate. Compare interest rates from multiple lenders before you choose a loan. You can use an online loan comparison site to make this process easier.
- Avoid add-ons. Add-ons, such as extended warranties and service contracts, can increase the cost of your car loan. Only purchase add-ons that you absolutely need.
- Maintain your car regularly. Regular maintenance will help to keep your car in good condition and will make it easier to sell or trade in down the road.
- Refinance your loan if you can get a lower interest rate. If your credit score has improved since you took out your loan, you may be able to refinance your loan at a lower interest rate. This can save you money on your monthly payments and help you to get out of debt faster.
Following these tips can help you minimize the chance of being upside down in your car loan. However, it’s important to remember that there is always some risk involved in financing a car. If you’re concerned about being upside down, you may want to consider buying a used car or leasing a car instead.
DMCC is a 501 (c)3 nonprofit organization committed to educating consumers on financial issues and providing personal assistance to consumers who have become overextended with debt. Education is provided free of charge to consumers, as well as personal counseling to identify the best options for the repayment of their debt. To speak to a certified credit counselor, call toll-free 866-618-3328 or email contact@dmcconline.org.DMCC is located at 1330 SE 4th Ave, Suite F, Fort Lauderdale, FL 33316.