When debt is the topic, a lot of people have mixed feelings about it. While a lot of us would rather stay away from it, the need for a high credit score makes it a necessity. If you want to be able to take advantage of the financial opportunities brought about by a good credit score, like low interest rates or even better employment possibilities, then you need to take in some debt.
If debt is important, what type of debts should you apply for? Is there such a thing as a good debt that will help you achieve a credit history yet keep you from a financial ruin? Well there is such a thing as a good debt, but there are some debts that are confusing – like car loans.
A car is necessary for most of us – especially for those who have a family with kids. However, because it depreciates in value as soon as you drive off from the dealers, some people think it is a bad debt. By the time you finish paying off the debt, the value of the car will be significantly lower.
Quarter 3 household debt scenario in general
On November 14, Reuters.com reported that the USA consumer debt is still rising for quarter 3 of this year. According to the article, almost all type of debts increased: mortgage, credit card, car loans and student debt. Here are important facts written on the article.
Student debt continues to rise with an outstanding balance of $1.03T in the third quarter report. This is a $33B increase.
Auto loans increased their balance by $31B.
Household delinquency rate is lower at 7.4% – compared to 7.6% in the second quarter of 2013.
Mortgage rose to $7.9T – an increase by $56B. Delinquency is higher at 1.6% from 1.5% the previous quarter.
Credit card debts are up by $4B.
One can wonder, is this evidence that our economy is growing strong that credit confidence is being fueled by it? Or is it an indication of another bout of bad financial habits?
The rising auto loans – should it be a cause for concern?
Despite this obvious characteristic of a car loan, a lot of people still increase their credit to buy cars. The Federal Reserve Bank of New York website release the Household Debt and Credit report for quarter 3 of 2013. Here are some of the important information about car loans in general.
New auto loans increase on the third quarter to $97.4 billion ($31B increase). This is said to be the highest level since quarter 3 of 2007.
Only 3.4% of auto loan delinquencies are late by 90 days or more – a steady decrease.
Auto loan inquiries increased from 159 million in quarter 2 and is now 168 million in quarter 3 of 2013.
Car loans are now 8% of the total consumer debt balance – right after mortgages (70%) and student loans (9%). Credit card debt is down to 6%.
According to the Reuters article, this increase is showing a positive growth for the car industry. However, what will this do to consumers in general? This data strongly suggests that consumer credit confidence is up for this sector and though that is a good indication of a stronger economy, it has to be met with caution still.
Although debt increased as people started buying more cars, USA Today reports that delinquencies are going down. The article thinks that this may be the reason why lenders are becoming relaxed in approving car loans.
It seems that lenders are getting encouraged because the statistics from the New York Federal Reserve show that 90 day delinquencies are getting down. From 4.9% during Q3 of 2012, it is now 3.5%. That is a difference of 1.4%.
With the good payment behavior, you can expect that lenders may be more willing to give lower interest rates on loans. This will encourage borrowers to use auto loans to buy their personal vehicles. This will all contribute, not just in the car industry, but also in the improvement of the economy in general.
But while all of this paints a good picture for the industry, should it be enough to encourage you to put yourself in debt for a new car? Will you really risk your finance just so you can drive around in a vehicle that will amp up your lifestyle in the eyes of your neighbors and peers?
Is it wise to loan money for your car?
Buying a car, is definitely not a bad thing. However, you need to analyze your finances carefully if you should go through with it or not. The thing is, even if the economy is going well, that is not enough reason for you to apply for a loan – especially a car loan.
In essence, buying products that lose value over time should be done with cash. As mentioned earlier, a car is one of these. But obviously, a car is a purchase that is quite costly so opting for a loan make some sense. But consider the following details before you proceed.
Cars start to lose value as soon as you drive it from the dealer. By the time you finish paying off the debt, the value would have been much lower than when you initially bought it.
The interest rate of car loans will make the money spent on the total monthly payments much greater than the value of the vehicle upon maturity of the loan.
Cars require money to maintain and use. You need to spend for gas, insurance and regular maintenance and repairs.
All three of these will really put a serious dent on your budget. So if you can limit the money that you will spend on car related costs, you must consider buying your vehicle in cash instead. That way, your purchase price will not be marred by interest rate and you may even get a higher discount. You will not bloat the price of the car unnecessarily.
But if you really want your car now and you think that you can manage and live with the total amount that you will end up paying the loan, then go ahead with it. We just have a couple of tips for you.
Make sure you have a high credit score. There are places to get an auto loan when you have a bad credit but we advise against it. You will be given a high interest rate that will also be a waste of your money. It will not take years to work on your credit score so if you can manage it, postpone your car buying intentions until after you have a better credit report.
Choose the vehicle you will buy carefully. Since gas prices are steadily rising, choose a car that is fuel efficient. Also, if you will buy a used car, get it from a trusted dealer. You do not want to get a bargain for the car only to spend a lot on maintenance and repairs later on.
- Calculate the amount that you will target for a car price. Although you may be approved to buy a top of the line car, do not give in to that. Choose a car that you need – even if it is lower than the loan that you are qualified for. Do not bloat your debt if you do not have to.