What Are the Risks of New Car Loans?

Buyers seek new car loans to finance the purchase of a new automobile from a dealer or manufacturer. New car loans come with different terms and rates than used car loans, and they are often a more affordable form of financing than used car loans. These loans are extended based on a borrower's personal financial history and credit score, not on the value of the vehicle in most cases. They are among the most common form of installment loan in the United States. Most new cars are at least partially financed. These popular loans do come with inherent risks, however. 

Over-Financing Yourself

One risk people encounter with new car loans is over-financing. When borrowers shop for a car before shopping for a loan, they often find one that they cannot truly afford. Then, they try to locate a loan to match the price of the car. It is not common that people shop for a loan first based on their budget. Over-financing can be risky on a few levels. First, you run the risk of defaulting on the loan if you cannot make payments. Additionally, when you have a debt ratio that is too high compared to your assets, your credit score will drop. If you are seeking a mortgage or other loan in the near future, this can raise the interest rates on your next loan.

Locking in Terms

Car loans traditionally do not have the most favorable terms for the borrower. It is common for borrowers to attempt to modify the loan by either paying it off early, consolidating with another loan or refinancing in the future. To assure against this, many lenders build in fees and penalties that are very high on new car loans. Banks typically offer better terms than car dealers. Furthermore, car dealers often have low introductory rates that will adjust to a higher amount in the future. Checking the terms of your contract and interest rate adjustments will save you a financial headache in the future. 

Losing Your Car

The biggest risk of any loan is always loan default. In the case of a new car loan, you may be at risk to lose your vehicle if this occurs. Many new car loans are secured against the car title. This means the lender will hold on to the title until the loan is paid off. If you default, the asset is usually seized very rapidly and without warning to you. You may be at work or school when a collections company comes to tow away your vehicle. Assuring against default through an emergency financial fund is the best way to protect yourself from having your asset seized. 

 


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