New Car Finance – 3 Potential Traps To Avoid

12th December 2018 – #8 in New Car Buying Tips | Subject: New Car Finance

new car finance traps

If you’re looking at new car finance, it’s really important you know how much of your monthly pay you should be setting aside for a car payment. Equally, if not more important is being aware of some of the new car finance traps you’ll want to avoid.

But first…

How much of my take-home pay should I allocate toward a new car payment?

As a general rule, monthly car payments should not exceed 20% of your monthly take-home pay. And be aware of balloon or residual payments if any when financing a new car.

What are balloon or residual payments?

Used with certain types of car finance balloon or residual payments are a sizeable sum of money that you’ll still owe at the end of a finance term. They’re not always a bad thing, but they can be if they’re not used thoughtfully and ethically as you’ll see below.

These balloon or residual payments are used to bring the monthly payments down which can be helpful. But, they can be a trap if you get to the end of the finance term and the car you financed is worth significantly less than the amount you still owe.

Here are some real-world scenarios to help identify the potential traps

Donna visits a new car dealership and a new car finance consultant says something like…

“But we could have you driving that car for X amount per month or maybe less… or this much better car for just a little more!”

3 potential traps here could be…

finance new car

  1. Donna may about to pay more for the actual car (than she should).
  2. And/or make lower payments. BUT, over a longer term (time period).
  3. And/or have a balloon/residual payment to deal with at the end of the term.

When any (but in particular all) of the above factors are in the mix, there are usually serious challenges in the future when it comes time to buy the next new car.

The future scenario might look something like this…

Donna now owes $18,500 on her current car. But, her car is fairly valued at $9000 (and going down)…

…Somehow $9,500 must now be found before Donna can drive away in her next new car. In this case, some of the shortfall is financed – the whole finance deal now done with a company who is prepared to do such a thing. If a deal is struck in this scenario, it will certainly be at a much higher interest rate as well.

This, of course, leaves Donna in an even worse predicament at the end of the next contract. As you can see, this is not a situation any of us want to get ourselves into. Nor is it a position anyone can effectively negotiate from in the future.

To reduce the amount of interest you pay over the term of the contract, have your payments structured comfortably and over the shortest time period.

We trust this post has helped you get a better understanding of new car financing and some of the potential traps.

Take care out there.


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