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Debt Consolidation – Be Careful When Trading In Your Car
By: Charles Essmeier
The automobile has long been recognized as the classic American status symbol.
America’s millions of miles of roads and overall lack of long-distance mass
transit leave the automobile as the primary method of transportation for most
Americans. Because so many people spend so much time in their cars, they often
use them to make a personality statement. The car is an extension of the driver.
Unfortunately, the debt incurred to pay a car is also often an extension of the
driver’s own financial problems.
Recent statistics show that the average auto loan is issued for 101% of the
purchase price. How can that be? It turns out that many Americans, in their
desire to maintain status, usually trade their cars in for a new one while they
still owe money on it. The high rate of depreciation on new cars means that
consumers often owe more money on their auto loans than their cars are worth,
and they make the situation worse by trading in that car on a new one while
still owing money on the old one. They simply consolidate the balance of the old
loan with the principal of the new loan.
Auto manufacturers hit us with a constant barrage of advertising for the latest
and greatest models of cars, trucks and sport utility vehicles, along with their
latest sales techniques of rebates, discounts and add-ons. Consumers often trade
keep their cars only until the desire for another one comes along and then head
out to the dealership to trade the old one in. This is usually done without any
regard for how much money is owed on the existing vehicle, leading to the
consolidation loan that adds the unpaid balance from the old loan to the new
one.
It isn’t smart to owe more money on a car than it is worth. Cars are generally
insured for the replacement value of the vehicle. If you purchase a car and roll
$5000 of debt from the previous vehicle into the new loan, you are now driving a
car that is not only worth less than you owe, but is also insured for less than
you owe. Should you find yourself in an accident, you’ll have a wrecked car and
a heavy debt, which is not a good combination.
Here are some tips for avoiding this scenario:
# Keep your loan term short. If you have to finance that BMW for eight years in
order to keep the payments affordable, you should probably be shopping for a
Dodge instead. Auto loans that exceed five years are generally unwise unless
you’re sure that you’ll keep the car for at least that long.
# Make a larger down payment when you buy. The less you borrow, the less you’ll
owe several years down the road.
# Keep your car until it has been paid off. This one is obvious, but few people
actually do it. The least expensive way to own a car is to simply keep it until
it won’t run anymore. If you keep the car longer than the loan period, put the
amount of your payment aside each month to save as a down payment for the next
one.
When you make a decision to purchase a car, consider the length of the loan
carefully. Most cars lose more than half of their value in five years or less.
Try to keep your loan duration as short as possible. An automobile is a valuable
tool to own, but it shouldn’t own you.
About the Author:
©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro
Marketing, a firm devoted to informational Websites, including http://www.End-Your-Debt.com,
a site devoted to debt consolidation and credit counseling, and http://www.homeequityhelp.net,
a site devoted to information regarding home equity lending.
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