Buying a car is expensive, which is why many buyers will need to take out a loan in order to purchase the car they want. However, problems can sometimes arise with car loans, making them more expensive than originally expected. Understanding these potential problems is the key to getting the most out of an auto loan. Here is a quick look at five common problems that may accompany your loan.
- High Interest Rates
When you take out a car loan, you are actually agreeing to pay more than what you need. Lending institutions will attach an interest rate to your loan, which determines how much money beyond the actual loan amount you will need to pay back in order for the loan to be fulfilled. For example, a relatively small loan of $10,000 to be paid over 5 years may come with a 3% interest rate. With this interest rate, this means you will actually pay about $781 extra by the end of the loan term, bringing your total borrowed amount to $10,781. This is a small scale example, but when you are financing a new car, the amounts can be much higher.
- Long Loan Terms
A longer car loan may not seem like a problem at first. It creates lower monthly payments and, as a result, can make newer or fancier cars available to you. The problem with a longer loan term usually lies with the interest rate. Longer loans are riskier for lenders and usually come with higher interest rates because of this. This means that over the life of your loan you will end up paying more than you would with a shorter loan term. For example, a $30,000 loan over 5 years with a 3% interest rate will cost a total of $32,343. On the other hand, the same loan paid over 8 years with a 5% interest rate will cost a total of $36,460.
- Low Credit Score
One of the biggest problems with auto loans is the restrictions placed on your eligibility based on your credit score. Specifically, the lower your credit score, the higher interest you will have to pay. This is especially true for loans through auto dealers; the higher interest rate means that you will only be eligible for a much lower loan amount while still being able to manage your monthly payments.
- Extra Fees
Auto loans will often come with extra fees attached for various reasons. For example, some lenders will charge a fee if you decide to pay off the loan early. Lending institutions may include such a fee in order to ensure they still make some profit off of the loan since the total interest will be added over the course of the loan.
- Getting Stuck in a Contract
After purchasing a car, you may decide to trade it in for a new car or you may even get in a wreck. In these cases, the owner of the vehicle will still be required to pay out the loan that was taken for the car. This becomes especially problematic if, as the result of car value depreciation and accumulated loan interest, you end up owing more on your car than it is worth.