WHY BUYING A CAR WITH HIGH INTEREST RATE IS A BAD DEBT

Buying a car with a loan that has a high interest rate could mean driving the car for a long time before being out of debt. With increased interest rates, vehicles become more expensive and coming with large loan amounts that require lengthier terms.

Why Buying A Car With A High Interest Rate Is Considered A Bad Debt.

Ideally, the question of good debt and bad debt comes to play when the appreciation or depreciation of an asset is being questioned. A car is not considered as an investment because it depreciates over time. A lot of people consider a car loan to be a bad debt, while other investments ( for example mortgages) is not a bad debt. If a car debt permits you to buy a car that is worth more than you need, it is a bad debt. If you can buy a used car with the amount of money you have at hand, the car would be repaired occasionally at a cost which might be quite lower than the bad debt which would be incurred on high interests. On the other hand,  a house is an investment which can appreciate and increase in value over time, this however depends on the location.  All debts costs money in interest. The question of if what you are borrowing for is beneficial needs to evaluated before a loan is being taken.

 Below are some reasons why a mortgage loan could be more beneficial than a car loan.

·      Everyone needs a place to live, and if you do not own a house, you will need to pay rent to somebody who owns a house. In contrast, cars are convenient, but are not absolutely a necessity to own. Other means of transportation exists, however are relatively easy in some parts than others.

·      Owning a house can give you some level of freedom to customize your living space, which you do not have when living in someone else' house. Cars in contrast, decrease in value over time and very rapidly as well. There are some exceptions though, which will require that you spend at least part of the time in debt and owing more than what the car is worth.

·      Homes tend to increase in value over time or at least hold their value depending on the market and location and condition of the house. In the United States, cars do not offer tax deduction. Property tax paid on personal homes in the United States is income tax-deductible. Property tax paid as part of rent is not tax-deductible.

·      Cars vary in prices. In the case of houses in the same location, more money can purchase bigger houses. A car that has the capacity to transport 4 or 5 people can be gotten for either $1,500 or $60,000. Buying a car that is more expensive than you need is luxury, while buying such car with a loan that has high interest rate is a bad debt.

Negative Effects Of Bad Debt On Personal Finances

Taking car loans with high interest rates often results in bad debt. Bad debt in turn has several negative effects on personal finances which are briefly discussed below.

Bankruptcy

Incurring so much debt can drive an individual to file for bankruptcy in order to seek protection under the law. Chapter 11, 7 and 13 are the three types of bankruptcy that exist. This process may be long, however provides some form of relief to debtors, enabling them come out of debt once and for all.

Wage Garnishment

Bad debt from car loans can lead to wage garnishment. In this case, the lender may seek a court judgment to have the wages of debtor garnished. The judge's order gives the debtors employer an order to make direct payment out the employees monthly paycheck to the creditor the debtor owes. The money being deducted deprives the debtor from settling order basic necessities.

Foreclosure

If a debtor has troubles paying back his car loans, foreclosure may occur. It may lead to the creditor taking back the car or the loan.

Emotional distress

The pressure associated with bad debt can be too embarrassing to  handle, from the constant phone call reminders, mail reminders, and so on from the creditor. The seizure of the car may follow.

How To Cushion Against Bad Debt

Do not pay towards principal on the car

The amount a debtor borrows is the principal. In the case of a car loan, the lender divides the original loan amount into a set of number of payments with respect to the time period. The amount owed monthly on the loan is fixed, however as the loan ages the proportion of each payment that goes to the principal or interest shifts. Generally, it is easier to reduce the loan principal by sending extra payments or by increasing the monthly payment to more than the lender's required minimum. Both strategies result in fewer or smaller payments due on the principal balance. The borrower needs to specify that funds in excess of the monthly payment are to be applied to the principal balance. Once the lender accepts the additional or larger payment, the decreased principal also results in a lower amount of interest due because of the decreased principal. For many loans, it also decreases the length of the loan.

The concept of paying towards principal is useful when taking loans for investments whose value appreciates over time, for example mortgages. In the case of car loans, investingport advises against paying towards the principal. This is because an accident could occur leading to car crashes and the money would be lost. It is rather better to pay a monthly minimum and focus on paying down other important debts like mortgages and credit card debts.

Using a GAP insurance

GAP Insurance is a form of insurance which guarantees that car loans do not become a financial burden in a situation where the car is totally damaged in a car crash or is stolen. GAP protects in times when you owe more on the car than it is worth, that is a period when you are upside down or underwater in your car loan. Upside down in car loans happens due to the interaction between the car depreciation and car loan amortization. If a car's value depreciates faster than how the loan is being paid down, then a debtor becomes upside down in the loan.