The car loan is almost as old as the car industry. In 1956, iconic business tycoon Lee Iacocca, then a regional manager with Ford, offered potential clients a strikingly simple deal: ’56 for $56′. The terms of the deal: Buy a ’56 Ford, make a downpayment of 20% and then pay off the car with monthly payments of $56 for the next 1,5 years. Since then, the logic of the industry has reversed, car loans have become the rule and paying the full car price in advance has turned into an exception. Increasingly, car buyers are experiencing serious difficulties, with many car loans outliving the car. What to do? We’ve compiled a few easy suggestions to help you get back on track again.
Car loan: Not as simple as it seems
Unfortunately, the scenario of your car loan outliving your car has become more likely than ever before. For one, the relative price of cars has gone up in comparison to average wages. As a consequence, downpayments aren’t anywhere near the 20% Iacocca demanded in 1956 and which experts have since continued to regard as a recommended minimum. Also, loans today tend to be drawn out over far longer periods than 36 months. Even loan runs of several years are nothing out of the ordinary, which means that by the time you’ve paid off your car, it is no longer in its prime or may require urgent repairs.
Even more troublingly, cars tend to depreciate quickly, especially in the first year, when its resale price drops by almost a quarter. In case of an accident or a write-off, insurances will only cover the current value of the vehicle. Which could put you in serious trouble, if you need that money for buying a new car,
When your car loan outlives your car
It is easy to see what makes an accident or theft so difficult. But what, exactly, is the problem when your car loan outlives your car? To understand the seriousness of the issue, you have to imagine what this actually implies: You’re still paying off your car, although you’re no longer able to use it and may already have to buy a new one. And this clearly puts you under severe financial pressure.
In some cases, you can add your existing car loan to the new one. But this of course doesn’t solve the issue, it merely pushes it further back in time. Especially if you depend on your car for work, a loan outliving your car therefore constitutes a veritable nightmare scenario.
How to protect yourself
Thankfully, there are several precautionary steps you can take to avoid your car loan outliving your car. Here are two of the most important ones:
- Maintenance: You’d be surprised how much you can contribute to the well-being and life expectancy of your car by means of a handful of easy measures. Check your oil regularly and refresh it whenever necessary. Make sure your tires are in good condition – a new set of tires may not be cheap, but it can partially be offset by the resulting reduction in fuel consumption and accidents. The more attention you bestow on your car, the longer it will last and the lower your chances of your loan outliving your car.
- Make sure that you have at least some form of insurance in case of an emergency or theft. Ideally, the insurance should cover the remaining costs of your loan, so you can pay it off and move on to a new vehicle. However, in some cases, especially if the car is already a few years old, its value will have depreciated, making it unlikely that the money from your insurance will cover the remainder of the loan. If you want to be on the safe side, a ‘gap insurance’ can bridge that difference.
Car loans at Concept Car Credit
At Concept Car Credit, we are well aware of the many serious problems resulting from a car loan outliving a car. This is why we talk you through every single aspect of your car loan and why we’ll do everything in our power to allow you to pay it off safely and within the lifetime of your vehicle. Our team is already looking forward to meeting you in person in our salesroom in Manchester!