Don't Fall Into This Car Loan Money Pit

According to the car data experts at Edmunds.com a record number of Americans are making one of the worst financial moves ever. Edmunds.com says that nearly 1 in 3 new car buyers are paid less when they trade in their car than the remaining balance on their car loan. That’s called being “upside down” on a loan: you still owe more on the loan than the car is worth. Edmunds.com says the average car buyer is nearly $5,000 upside down on an existing loan when shopping for a new car. That means that in addition to buying a new car, they have to come up with another $5,000 to pay off their old loan.

This is also a huge problem with used-car buyers: 1 in 4 are upside down on their existing loan when they trade in and get another car.

People, this is absolutely insane. You need to stop being played by the banks and auto lenders, who have suckered many of you into thinking it is okay to take out a long-term loan to pay for a car. It wasn’t so long ago that the average car loan was for just 36 months. Then 36 became 48. And the norm of a 48-month loan soon gave way to 60-month loans being typical. And it just keeps getting worse. These days, more than 40 % of car loans are for more than 60 months and nearly 30% are for more than 72 months. That lenders are doing this makes sense for their bottom line: They know you can’t really afford the car, so they just stretch out the loan terms to make it seem affordable.

It’s up to you not to fall into this trap. My car advice:

• Stick with an upside down car. If you are upside down on a car loan, don’t you dare think about trading it in, unless it is no longer safe to operate. But there is likely little chance that’s the issue: if you bought a car just a few years ago, chances are pretty high it is running just fine, but you’re just itching for something new and different. Don’t scratch that itch. I know car dealers will tell you it’s no problem because they can simply roll over your remaining balance on your current car loan into the new car loan. Please. So you’re going to double down on what you’re shelling out each month for transportation?
• Don’t ever fall for the long-term loan again. When your current car has reached the end of its days, your goal should be to buy a car that you can pay off in three or four years. Not five. Not six. And certainly not seven. A car may be a necessity, but you should aim to spend as little as possible for car that meets your needs. To splurge and spend more is financially irresponsible. Every month you continue to make a payment is a month where that money could have gone toward financial goals: saving for retirement, saving for college. Paying off student loans, or paying down a mortgage. All those goals are about building financial security. Overspending on a car is a financial waste.