How Much is that Car Loan is Really Costing?
Transportation is a Necessity
Cars have become a necessity we rely on for our everyday lives. They are important tools for getting us to and from work, the grocery store, or doctor’s appointments. Today, most cities are designed to accommodate car travel, making it impractical to travel by more cost-efficient means like subway, bike, scooter, or even walking. Rather than building public transportation systems or friendly roads for bikes, scooters, or walkers, we are spending millions of dollars to accommodate more and more cars. Think of the constant construction to our roads and interstates. Simply put, we need a car to get around, and a car is a protected asset in bankruptcy for the simple principle that if you can’t get to work, you can’t pay your bills.
What is an Annual Percentage Rate and What Does It Mean?
The urgent need for a car can cloud our judgment, and we aren’t aware of how much we are paying. Mountains of paperwork and thought exhaustion from the car hunt also contribute to our haste. Additionally, car dealers aren’t quick to explain the extra charges written in the contract that you sign. They are looking for their commission on the sale and not for your best financial interest. You’ve heard the sales pitches, “Bring in your W2, drive away in your new car.” The car dealers want to know how much you make, where you work, and how often you get paid so they can auto-draft your car payment on the exact days you are paid. They aren’t concerned with other bills you must pay like rent, utilities, daycare, groceries. If the car dealers consider you a high-risk customer, they will charge you a high interest rate. Be sure to check the rate on the paperwork. The “Truth in Lending Disclosure” is usually on Page 1 of the Retail Installment Contract. There you will find the APR (Annual Percentage Rate) and the Finance Charge. The APR is the extra amount you pay each year in addition to the purchase price. It is the cost you pay for financing the car (which does not include the cost of the car). So, if you buy a car for $27,000 (the amount financed, or the car’s purchase price) with an APR of 16.99%, the Finance Charge is $15,000. In sum, you are paying $42,000 for that car (not $27,000). The final price ($42,000) is noted in the “Total Sales Price” column of the Retail Installment Contract.
Can I Reorganize My Car Loan?
If you think you are paying too much in interest, check your sales contract. Anything over 8-10% is too high. If you bought your car more than six months ago, and your interest rate is more than 8.0%, consider reorganizing your car loan in a chapter 13 bankruptcy case that allows you the protection mandated by federal law. Oftentimes, you can lower that interest rate to a reasonable amount, anywhere between 5.5% and 7.5%. This will lower your payment amount, putting more money in your pocket each month. Trading in the car for another is not a good option. The amount you still owe on that first car will be rolled into the next car loan, known as “negative equity.” Essentially, once you’ve signed the papers at the car lot, you can’t get out of the loan – even if you return the car to the dealership the next day - unless - you off the loan in full or choose to exercise your rights under federal law of the U.S. Bankruptcy Code to reorganize the loan or wipe it out entirely.