Debt Consolidation ? Be Careful When Trading in Your Car

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.

    ©Copyright 2005 by Retro Marketing.

    Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including End-Your-Debt.com, a site devoted to personal bankruptcy, debt consolidation and credit counseling, and HomeEquityHelp.com, a site devoted to information regarding mortgages and home equity loans.

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