According to the Consumer Federation of America, high car prices are creating a financial emergency in America. With new car prices averaging nearly $50,000 — and 20% of new car buyers paying $1,000 or more for their monthly car payment — it’s no surprise that the total level of auto debt in America has reached a whopping $1.66 trillion.
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The consequence of all this debt is that defaults, delinquencies and repossessions are all rising, approaching levels not seen since just before the Great Recession, according to the Consumer Federation of America. Here are some steps you should take to avoid falling into the precarious financial situation that many Americans are in.
Make a Realistic Budget
If you don’t budget before you buy a car, you’re setting yourself up to overspend.
Before you even begin shopping — and certainly before you get anywhere near a dealership — make a realistic budget for your car payments based on your real-world income and expenses. Don’t forget to include all of the extra costs that come with owning a car, such as insurance, maintenance and gas.
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Shop Around for Better Financing Rates
Auto financing is a competitive business, and this can work to your advantage when you’re buying a car.
While your dealer might quote you one rate, it’s likely that the bank or credit union down the street will offer you a different one. Online lenders can often quote you even lower rates since they have lower overhead costs.
Just be sure to pick a lender that can properly service your loan — and don’t get caught in the trap of extending the term of your loan just to get a lower monthly payment. If you take out a seven- or eight-year loan, not only will you pay much more in interest, but you might end up underwater on your loan, owing more on the car than it’s actually worth.
Put More Money Down
One way to help avoid the delinquency trap is to put more money down when you buy a car. For starters, putting more money down upfront will reduce the amount you have to pay every month. This can help make buying a car more affordable.
Also, with more money down, you immediately build equity in your car. If your payment ever becomes too much to handle, you can sell your car and still get something out of it.
Pay Cash for an Older Car
If you’re really looking to avoid the risk of delinquency on a car loan, simply pay cash for your car. Buying a car outright completely eliminates the risk of delinquency because you won’t even have a loan.
As most Americans can’t just slap down $50,000 to buy a new car, this strategy likely means you’ll have to buy an older car. But many financial advisors will suggest that if you can’t pay cash for a car, you can’t really afford it anyway.
So even though it might not be glamorous, you might have to put aside those dreams of a flashy, brand-new car with all the latest gadgets in favor of something reliable that will safely get you from point A to point B.
If You’re Stretched to the Breaking Point, Be Proactive
When it comes to your finances, it’s always important to deal with reality instead of wishful thinking. If you’re at the point where you’re about to miss some payments on your car loan, it’s time to be proactive.
Contact your lender as soon as possible and explain your situation. Ask if there are any modification or amnesty programs if you’re going through some short-term financial difficulties. In many cases, your lender will be eager to work with you because they will suffer if you stop paying your loan.
If you can’t strike any type of deal, consider selling your car and swapping to a more inexpensive one that you can better afford.
The Bottom Line
No one expects to fall behind on their car payments, but unfortunately, delinquencies are on the rise. To help protect yourself from becoming part of the growing trend, use these steps to create a plan before you buy a car.
And don’t forget to err on the conservative side when it comes to your finances so that you have a margin of error if money gets tight.
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This article originally appeared on GOBankingRates.com: Car Delinquencies Are on the Rise: What You Can Do To Protect Yourself
