How to Avoid Going “Underwater” in your Vehicle….Loan
In a previous post, we spoke about ways to get out of an “underwater” car loan.
In this post, we will discuss a few ways to avoid getting into an “underwater” situation in the first place.
When you become interested in purchasing a vehicle, the first step you should make is to check your credit. This will help you determine what interest rate you may qualify for. You want to shoot for an optimal rate. If you have a credit score over 720, this will put you in a better tier and you could expect to pay a rate of 3.724% or less. Consumers whose credit scores are sub 720 can expect to pay an average of 5.098% or higher according to creditdonkey.com. A high interest rate is almost a sure fire way to end up underwater in your auto loan. Check with your local credit union or bank, as they will often have rates and terms that will match or beat the terms of a dealership.
Do your research! Shop around. Check out what the average selling price is of the car(s) that you are interested in to ensure you get a decent deal. KelleyBlueBook, TrueCar, and Cargurus can help with this. This will help you know what to expect when you walk on a dealer’s lot.
Factor In Depreciation. Cars are depreciating assets, but some cars depreciate faster than others. You want to purchase a car that doesn’t depreciate at a fast rate to ensure that as you pay the balance down on the loan, the value will be in line with it.
(*There will be a future post on vehicles that you may want to avoid purchasing due to rapid depreciation.)
Make a down payment. This will immediately cut down the loan balance and help you get ahead of the depreciation curve.
You don’t need the “add-ons”. When you are finalizing your auto purchase and signing the paperwork, you will be offered myriad of upgrades, warranties, protections, and insurances. Most of these you will not need. I am not totally opposed to some of these items, but keep in mind that they will increase the cost of your vehicle and loan balance. It will be enticing because stretched out over the term of the loan will minimally increase your monthly payment.
The shorter the loan term, the better. Don’t be tempted to extend the term of your loan over a longer period of time in order the get a lower payment. This is very enticing, but it is accompanied by a higher interest rate. This will prohibit the loan principal from being paid down as fast; therefore, leaving you with a higher risk of ending up underwater.
Buy used vs. new- Cars depreciate the most in the first two years. Consider purchasing a 1-2 year preowned certified vehicle. It will be less expensive than purchasing a new one, and it will have absorbed the largest depreciation hits already.
Avoid taking on the balance of your trade-in on your “new” car. If you are already underwater in a car and decide to trade it in on another vehicle, that balance has to go somewhere. It gets added into the cost of the vehicle you are purchasing. When you bring negative equity into a new loan, you are burying yourself in the loan from the start. Make sure to start off on the right foot.
Good luck on your next vehicle purchase!
Being Underwater in Your Vehicle…
You might have heard the phrases “upside down” or “underwater” when it comes to real estate.The same can apply to your vehicle.The meaning of this phrase refers to owing more on the loan balance than what your home or car is worth.For the purposes of the writing, we are discussing auto loans.The very first thing you have to do is find out whether or not you are actually “underwater”. If you happen to be “underwater”, you need to know by how much. Finally, we will discuss how to remedy this situation.Find out the balance of your auto loan. Review your most recent loan statement. If you don’t have one available, contact the financial institution that financed your vehicle and request the balance. Also, take note of your interest rate. (We will go into more detail about interest rates in another post.)Find out the value of your vehicle. This can be easily found online with sites such as KellyBlueBook.com, Autotrader.com, Edmunds.com, and NADAguide.comCompare the value vs. the balance. If your balance is lower than the value of your car or around the same amount, you are in good shape. If the balance is higher than the value, you are considered to be “upside down” or “underwater”. If you fall into this category, don’t fret. Here are a few ways to turn that upside down loan right side up:Make principal payments: Any time you have extra funds, make a payment towards the principal of the loan. Ex. If your monthly payment is $400, try to pay $100-$150 extra towards the principal.Whenever you receive bonuses, birthday money, income tax refunds, make an even larger principal payment.*This will also assist you in paying the loan off faster.Refinance your vehicle: Your credit may have improved since your loan was originated. Refinancing with different terms could bring the balance more in line with the value.*Don’t stretch the term too far out, though. The longer the term, the chances of you going underwater again increases, as the value of the vehicle continues to decrease.Sell your vehicle: If you have funds saved, you could sell the car and start fresh. Try to get the highest amount for it. Keep in mind that you will have to cover the difference between the sale price and loan balance, hence the need for funds saved.I hope this was helpful in assisting you with identifying whether or not you are upside down on your auto loan. If you happen to find yourself in that situation, I hope that one of the suggestions mentioned will be a good solution for you.
- Published in Auto, Business, Finance, personal finance
When is the Best Time of Year to Buy a Car???
Well, Q4 is upon us. This is what I consider to be the best time of year to purchase a car.
As you probably already know, dealerships have goals and quotas to meet. Included in this would be end-of-year goals. Making a car purchase at the end of the year could increase your chances of getting a better deal. According to iseecars.com, the months of November and December offer 26.9% and 23.5% more deals than average, respectively. If I were in the market for a new car, I would begin my search now, in October. There are deals to be had in October, and it gives more time research and compare prices. Pick 3-5 vehicles that you are interested in and compare pricing, options, rebates, promotions, etc…
In addition to quotas, another prompt for dealers to discount cars is due to overstock. The new models begin to roll out late summer and fall, and the dealer has to make room for these new cars. For instance right now, you may begin to see better deals on the 2019 models as the 2020 models are beginning to fill up the dealer lots. Pay attention if a vehicle has been redesigned for the new model, you may begin to see significant discounts on the current model, because they can appear to be less desirable. On the flip side of this, if you are in the market to lease a vehicle, you may see better lease deals on the newer model compared to the current model. Tip: Ask the dealer to show you a side by side comparison of 2019 and 2020 model lease rates. The newer model will likely have better rates due to residual value. Residual value on a lease refers to the estimated value of the lease vehicle at the end of the scheduled lease term.
If you are in the market for a preowned vehicle, there are deals to be had, they just may not be as heavily discounted compared to new vehicles. Larger dealers will begin to receive an influx of people who want to trade in their cars for the latest models and lease terms will be coming to an end. This will present an opportunity to purchase a nice preowned vehicle.
When doing your research and preparing for your car purchase, there a few things to keep in mind.
If the vehicle you want is a strong seller and in high demand, there may not be much of an incentive for a dealer to discount the price.
This may be a similar case for smaller independent used car dealers. Their profit margins may not be as large and they may not have the overstocked inventory problem to contend with to warrant heavy discounts.
The end of the year is not the only time there are good deals offered. Take advantage of holiday sales events and promotions. Christmas and New Year’s, but also Memorial Day, 4th of July, and Labor Day sales can have good discounts.
Most importantly, exercise patience. When negotiating a car purchase, be willing to walk away if you do not feel good about the deal and if isn’t right for you. Wait for the deal that you want (if it is within reason). Chances are you will not likely get a $20,000 car for $12,000. Do your research so that you know what your ideal car is selling for. Truecar.com and Cargurus.com are great resources for price comparisons.
Good luck on your car purchase journey!
Cruising in a FJ Cruiser
If you have known me for just about any period of time, you know that one of the things that I am passionate about is cars. I love to see, drive, and occasionally buy them. I keep a mental list of cars that I would like to one day drive and sometimes own. They range from high-end exotics to quirky clunkers. Most of them are iconic cars of the late 80’s and 90’s, the era that I grew up in.
Today I had a chance to cross one off of my driving list.
I had the opportunity to drive a 2008 Toyota FJ Cruiser…
Here are a few takeaways from my experience:
1.It drove well, decent acceleration and handling(for what it is
2.It’s a niche vehicle so you kinda have to really want one(think Jeep Wrangler)
3.Not the best visibility, has a few blind spots
4.Accessibility was better than I expected with rear access doors
Overall, I would give it a thumbs up. If you are interested in owning it, the vehicle happens to be for sale in Jacksonville, FL. Contact me for details.
If you have an interesting car that you would like to have featured on IG or my blog, feel free to contact me
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- Published in Auto, Business, Uncategorized