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The car loan that never ends

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Guest blogger Leanne Salyzyn is an insolvency counselor, licensed restructuring professional and trustee in bankruptcy. Post a comment or contact her on Twitter with your personal-finance questions.

It’s a scenario that happens all too often. Your car is not working, or its aging, or your needs have changed.

You want to replace it but you haven’t finished paying the original vehicle financing contract. You check online or visit a few dealerships and find the car of your dreams. The financing manager says not to worry. They can help you get the car you need by paying off the old loan and rolling it into the new loan. In order to make the monthly payments affordable, they suggest extending the loan over 60 months. What do you care? You got the car you wanted and got out of the old contract. But did you? You are explained the terms of the financing contract and get the gist of it, but your eyes just glaze over the contract. You see that you are paying more than expected but are thinking, “Hurry up and give me my car!”

Fast forward to a few years and it hits you. You are paying close to double the fair value of the current vehicle as a result of the loan rollover. Imagine your needs change again, or your “newer” car needs to be replaced again. You do the same move and now you could be paying for three cars when you actually only have one. For many, this creates the car loan that never ends and a potential debt problem.

Consumers should consider a few factors when buying a car to avoid this situation from happening.

Personal Situation

While you may be tempted to buy that two-door sporty car, are you considering starting a family in the next few years? If so, maybe a four-door would be more practical when you consider a car seat.

Work Situation

You may be making a good income working out West and can afford the expensive truck payments today, but what if work slows? This may not be the best time to commit to a five or seven-year loan that you may not be able to afford in the future.

Age of the Vehicle

If you are purchasing a used vehicle, consider how long you intend to keep it and the length of the loan. Very few people nowadays keep a vehicle for seven to 10 years. Will the loan outlive the car? Consider not just the car payments but also the cost to maintain the vehicle.

Interest Rate

Find the best interest rate. The lower the interest rate, the more money saved. A poor credit score generally equates to more risk of default to the lender. The lender then passes this risk onto the purchaser in the form of higher interest rates. It’s not unheard of to see vehicle financing rates between 29 to 35 per cent or more. However, many consumers have no choice but to sign on the dotted line since they have no savings to buy a car outright and can’t get vehicle financing elsewhere. The risk: you end up buying another older car that will not last the balance of the loan.

Total Cost

In order to afford the vehicle, most consumers focus on the bi-weekly or monthly payment as opposed to the total vehicle cost. Know the total repayment amount, including taxes, administration fees and the cost of borrowing. If it seems too much to handle, it may be. Rethink your decision.

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Unfortunately, too many people plan for the best case scenario rather than the worst. As a result, they get trapped into loans they cannot afford and sometimes at very high interest rates. Taking the time to consider these factors could save you money and anxiety in the future.

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