Managing a car loan is all about knowledge. When you decide to finance your car, you need to pay attention to a few details that can save you money and can keep you away from trouble. Being responsible, well-prepared, and mindful about your debt is mandatory, otherwise, you will severely damage your credit score.
One thing you may have noticed is that a regular car loan has a lower interest rate than a credit card. This happens because it is a secured loan. This means that the car that you buy serves as collateral. If you fail to keep up with your monthly payments, the lender is entitled to recover the entire remaining principal by taking away your car and putting it up for an auction.
If you ever finance a vehicle, set aside some extra cash that can cover the payments for 3 months. Always pay on time and if you encounter financial difficulties, use your emergency fund to keep up with the payments.
Another important aspect that many misunderstand long-term loans. Most would recommend a 60-month loan but some lenders can offer even 72-month loans. The longer the period the more money you lose. In the first few years, you pay mostly interest and very little principal. If you go for a loan that is 48-months or more, you will discover that even after reaching half-way through the period, you barely some of the principal.
You will notice that even if you paid for a couple of years on the loan, you owe more money than what the car is worth. Try going for periods that are no more than 60-months. The lower monthly payments on your car loan are not worth it as you will pay more in interest. If you can afford it, take larger monthly payments over a shorter period.
