Few people have the ability or inclination to buy cars in cash. Most get a car loan to afford the purchase and spread out the payments over a few years. This allows them to drive the car now even if they have not paid the full price. However, this comes with a risk. They could lose the car if they miss consecutive payments for whatever reason. The lender can take it to recoup the balance from the loan. The probability may be small but it is real. Make sure that you don’t end up as part of the statistics by considering the following:
Don’t bite off more than you can chew. Pick a car with a price tag that you can afford. Don’t just look at your monthly income when selecting a model. After all, you need to pay for your recurring bills and other loan payments. You need to buy groceries and other household needs. You might also have allocations for your savings, investments, and vacations. What’s left is your disposable income. Which car can you buy with this much or less as monthly payment? You might need to recalibrate after this exercise. Go for a smaller model if you have to.
Financial hardship can happen to anyone. Nobody is immune to life’s misfortunes, although many would like to think they are. Recent events have shown that catastrophe can occur suddenly with lasting effects. Some may lose their jobs or their businesses. There are couples who may go through a divorce or the death of a spouse. People can develop severe ailments or get into serious accidents. Any of these can create financial shocks that may prevent continuous loan payments. Getting new loans to cover old ones is a dangerous option. It is best to anticipate hardship by putting up an emergency fund worth 6 to 12 months of expenses.
Lenders check the background of their applicants before approval. If someone has a history of defaulting on past loans, then they would hesitate to give this person a car loan. If they push through with it, then it may come at the cost of a high interest rate. You will end up paying a lot more in the long run. If you have a bad record, then consider rehabilitating your credit rating through consistent payment of current loans for a year or so before applying for a car loan.