You are here:

Don’t Drive Your Way into Financial Poverty By Janice Parker

Janice ParkerRecent studies show that the next big economic catastrophe could be auto loans. Say what???

More buyers who borrow to purchase used cars may find themselves overextended with a loan that stretches well beyond their fast-depreciating vehicles’ best years. Auto loans, including the loans extended to prime and subprime borrowers, topped $1 trillion for the first time last year, according to Experian, exceeding the outstanding balances on U.S. credit cards. Once a minority, six-year or longer auto loans now make up one-third of all new loans.

Consumers with poor or less than perfect credit will likely be shopped to the subprime car loan market. Subprime lending (auto, credit, housing or otherwise) generally is extended to borrowers with credit scores below 600. For some borrowers, a car is more than just a means of transportation; it can be a gateway to a better job and financial future. Often overlooked is how important the car loan can be for improving an individual’s financial future.

An auto loan directly impacts two very important factors of your credit score — payment history and credit mix. If you make the right decision, you’ll have reliable transportation, with a loan that’s strengthening their credit history with each successive on-time monthly payment. Make the wrong decision and you’re stuck with a fixed expense that restricts your ability to save money for emergencies, meet household and living expenses or accomplish life goals.

When borrowers default on car loans, lenders repossess the vehicle and resell it with the goal of recovering as much of the outstanding loan balance as possible. This also can have a major negative impact on your personal credit score.

It’s not uncommon for me to see a consumer’s auto debt equal to or MORE THAN their housing expenses. Don’t let the immediate gratification of driving a brand new car put you in a bad financial situation for years to come and then you daily try to justify to yourself that it’s okay because you need a car for work. You may “need” a car, but is it the 2016 with a $600 car note?

Poverty is perpetuated by a strong hold. It brings with it a spirit of losing. Claim victory over your debt and poverty and start winning today. Drive yourself into prosperity!