How to Avoid Debt and Financial Problems when Purchasing a New Car

Avoiding Debt Problems When Buying New Vehicle

As you go through life, you accumulate debt, particularly when paying for expensive items, like cars.

Many people, however, find it challenging to manage credit successfully.

What seems like an enticing offer on a vehicle can soon become a millstone around your neck, causing you all manner of financial problems.

In general, car loan debt is beneficial.

Many people living in Canada need a vehicle to earn money and achieve the lifestyle that they want.

However, buyers often get into trouble when creditors entice them with deals that they can’t afford.

Bad car loan debt can become expensive as interest payments mount.

Fortunately, you can avoid debt and financial problems when buying a new car when you adopt the strategies we discuss below.

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Save Money Each Month To Buy Your Car Outright (Or Put Down A Larger Deposit)

Dealerships and creditors prefer you to take out a loan to purchase a new vehicle – to the point where it is now the industry standard.

As a consumer, however, finance isn’t the best option.

Taking out a loan increases the overall price you pay (because of the added cost of interest).

And it can quickly eat into your disposable income and make you much worse off overall.

Many people, therefore, choose to save money and then either put down a large deposit (to minimize the amount they borrow) or purchase the vehicle outright.

Remember, you don’t always need to replace your existing vehicle immediately.

You can often run it for a further six to twelve months while you accumulate the capital you need to invest in a new car.

Take Alternative Forms Of Transport To Avoid Depreciation

Cars have a nasty habit of depreciating rapidly.

Once you drive a new vehicle off the showroom floor, its value plummets as the miles rack up.

Fortunately, you can avoid these losses by using alternative forms of transport, such as cycling, walking, or even taxiing from time to time.

Reducing the mileage on your odometer increases the vehicle’s trade-in value, slashing the cost of any additional borrowing on your car.

Be Honest About Your Budget

Car dealerships are very good at convincing you that you can afford to purchase a brand new vehicle.

They sneakily break down the price into manageable monthly chunks, making payments appear much more reasonable.

While some deals are indeed excellent value for money, you must never go into a negotiation unarmed.

Before you indicate your interest, be honest with yourself about how much you can afford to spend.

For example, if your current monthly income is CAD 4,000 and your disposable income after taxes and expenses is CAD 1,000, you should keep your car repayments down to less than CAD 500 per month.

Any more than this amount and you will put yourself under considerable financial strain.

Avoid Vehicle Financing Problems

If you decide to go ahead and take out a car loan, you still need to take steps to avoid vehicle financing problems.

Beware Weekly Payment Offers

First, be wary of prices quoted in weekly payments.

Car dealerships will often try to break down expenses into smaller and smaller chunks to make them appear as affordable as possible.

For instance, a car might cost “just CAD 110 per week” and may, therefore, appear affordable.

If you make CAD 600 per week, then CAD 110 seems like nothing – you spend that on food!

However, when you do the math, you soon realize that buying a car on finance at this rate isn’t as affordable as you might think.

CAD 110 per week works out at CAD 5,720 per year, which, suddenly, doesn’t seem like such good value.

On top of that, there are additional costs of running a car, such as fuel, tax and insurance, which could easily top a further CAD 120 per month.

By the end of it, you’re easily looking at CAD 7,160 in expenses – a substantial chunk of your earnings.

Beware Cashback Offers

Some dealerships offer cashback when you take out a loan as an additional incentive to purchase a vehicle.

But far from sweetening the deal, this facility actually makes your debt situation worse.

Dealerships like to provide their customers with jumbo loans.

It means that they can sell more cars and earn fat commissions from their credit partners.

For this reason, they will sometimes offer you cashback with the promise you can use it to pay off credit card debt or go on holiday.

Offers such as these, however, aren’t as rosy as they seem.

The “cashback” you receive is actually an additional loan secured against the value of your vehicle.

You will eventually need to pay it back, with interest, to the dealer.

In some cases, cashback can work.

If you have expensive credit card debt you need to pay off, rolling this into a car loan may lower your overall repayment costs.

But if you misuse the facility, you can find yourself in even more significant financial pain in the future.

Beware Variable Interest Rates And Buyout Options

Car dealerships and their creditors often go out of their way to get more money from their customers.

Low teaser interest rates are one of their favourite tactics.

Here, they offer you a cheap loan for the first twelve months and then ratchet up the costs after that.

You need to be careful, therefore, when figuring out whether you can afford the loan.

You should consider both repayments you need to make now, and those you will have to make in the future.

Similarly, many dealerships offer agreements where you have to buyout the vehicle at the end of the loan period.

Many consumers are surprised to find that these arrangements apply to both cars bought on lease and loan. 

How To Solve Your Car Loan Debt Problems

If you have debt problems because of a car loan, you should discuss your options with a licensed trustee.

They show you your legal rights and introduce you to mechanisms you can use to reduce, and even clear, any money outstanding.

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