Don’t let your car loan break the bank

We hear a lot of talk about the mortgage loan crisis, but there’s also a growing credit crunch with car loans. Repo lots are piling up because too many people have cars they can’t really afford. As with sub-prime mortgage loans, finance companies have made it easy to buy cars, regardless of your income or credit history. But some of the people most at risk are people who trade up for a new car every three or four years before the old car loan is paid off.

Car dealers and finance companies offer great incentives to help you trade in your car for something new. Cindy and Stephen Gerhardt bought in on the offers. Now they’ve got a problem. “We pay over a thousand dollars a month in car payments,” said Stephen. “Which is more than our mortgage payment,” Cindy added. “$400 more,” said Stephen. The Gerhardts are on a treadmill of car loan debt because of their history of trade-ins.

Between the two of them, they’ve traded in eight cars in five years, but never before the cars were paid off. The old debt was simply added to the new loans. “Every time we traded in a vehicle we thought we were doing better and coming out ahead, but our negative equity just kept building and building and building,” said Stephen. Experts say the average person trading in a car owes $4,200 more than the vehicle is worth. “Right now, we’re stuck with them,” said Stephen.

“We’ve talked about letting my pickup go back. The only problem is, they’re going to make us pay for the negative equity that’s in it. So we’ll be paying for a vehicle that we can’t even drive.” Financial expert say a big part of the problem is long-term car loans that stretch out the contract over five, six or even seven years. They say if you need a seven-year loan, you can’t afford that car. The best advice: get pre-qualified for the shortest-term loan possible.