Car Finance Problems

For many people, obtaining financing is the only way they can afford to purchase a new or reliable used vehicle. Financing can be obtained from a car dealer, bank or credit union, and interest rates can vary based on factors like current economic conditions, the availability of dealer incentive programs and your credit rating. Financing a vehicle does pose some potential problems for the borrower.

Insurance Costs

Whenever you finance a vehicle, your lender also has a financial interest in the purchase. As part of the financing agreement, your lender will most likely insist that you carry comprehensive and collision coverage, which pays to repair or replace the vehicle if it is damaged or stolen. Comprehensive and collision can comprise as much as 50 percent of your total insurance premium. You'll need to maintain comprehensive and collision until you've paid off the loan.

Falling Behind

You don't officially take full ownership of the vehicle until you've fulfilled your obligation to the lender, which could take five years or more. In the meantime, a job loss or illness can create financial hardship for you. If you can't keep up with your payments, your lender can repossess the vehicle without your consent. When a lender repossesses a vehicle, it typically sells it at auction to get whatever value it can. You'll still be responsible for paying the outstanding balance, as well as the fees charged by the repossession company. Your credit score will also plummet.

Poor Credit

If you've had a history of late payments or a previous repossession or bankruptcy, expect to pay much higher interest rates than someone with favorable credit. To be able to afford the monthly payments, you may have to settle for a vehicle that does not meet your needs or may prove unreliable. Dealers may be reluctant to offer you financing unless you can make a large portion of the purchase in cash.

Upside-down Loan

If you still owe money on your current vehicle when you trade it in, the dealer may allow you to roll your existing loan balance into the new loan. As a result, you may immediately owe more money than what the new vehicle is worth, a condition commonly referred to as being "upside down." If the vehicle is destroyed in an accident or stolen, your insurance company will only pay to replace it based on its current value, and you'll be forced to come up with the difference. The only way you may be able to avoid this is to purchase gap insurance when you buy the car, which will cover the balance you owe.