Car loans are no joke. It is a serious business that needs a serious plan. Mishandling a car loan often leads to car repossession and heaps of debt.
The key to effectively managing a car loan is creating a realistic plan of how you will handle it. It is important to create this plan even before getting the loan because this will show you if you can handle the loan. Here are some things you can do to avoid making a horrible mistake in getting and managing a car loan.
Assess Your Financial Situation
Before signing any deals, you first need to sit down and evaluate your financial life. Be brutally honest about yourself. Be your harshest critique. First, do you need a new car, or is it just peer pressure or a status symbol? Don’t buy an investment this big if you do not need it. Second, can you afford to buy a car in your current situation? Is your monthly income enough to cover your basic needs and meet your monthly bills? Do you have an emergency fund just in case things turn to worse? Also, if you currently have an existing loan, it is best to wait until you are done paying it off just to stay on the safe side.
Craft a Detailed Budget
Your budget should be an actionable plan of how you will allocate your money to make sure that you do not miss any due dates. The budget should take into account your other expenses such as mortgage, utility bills, grocery, loans, and others. Don’t leave anything out. Then if you see that you have to make unreasonable sacrifices (like preceding healthy meals) just to stay on top of the car loan, consider getting a cheaper car or even a secondhand.
Consider Refinancing Your Loan
If months into the loan you find that your credit score has improved, consider refinancing your car loan. Refinancing is essentially paying off an existing loan with funds from another loan. This is ideal if you have an improved credit standing and can land deals with lower interest rates. This will get you better rates but should not extend your payment term. Compare rates from banks and credit unions, but avoid shopping around too much as inquiring at more than three financial companies can harm your credit score.
Be Proactive About Defaults
Sometimes, no matter how much we plan, life happens, and we find ourselves in rocky financial grounds. If you can foresee a default in the next few months, you need to act on it. One option is to renegotiate your loan for alternative payment terms. Many creditors would rather renegotiate with you than repossess and resell the car which are total hassles on their part.
Another option is to sell the car (check with your lender the terms for selling the car) and use the proceeds to pay off your remaining balance.
A car loan is a major financial decision that you need to look at from every possible angle. Keep these tips in mind as you decide on getting a car loan to stay financially healthy and free.