A Car Loan gone Bad

 

Jae’s story…..


****How to go broke buying a Used Car.

A friend of mine bought a used car.  She paid about retail book value.  She had been repairing her credit from some hard times so her credit was not very good.  She had been turned down for a couple of loans.  She found a dealer that could get her financed at 18%.  She spent $20,000 on the used car, it was only a year old and in great shape.  The dealer told her if she did not miss any payments for the next year she could probably get it refinanced at a lower interest rate in a year as her credit score increases.  He also sold her a warranty for $4,000 that was added onto the car loan.  It is now 18 months later.  The car has dropped in value by another $3500.  She has paid down the loan $2400.  She cannot get it refinanced because she is about $5000 upside down in the car.


So she is stuck in a car that is depreciation faster than she is paying it off.  She got the loan for six years.  It will be five years before she will owe less than the car is worth.  She is literally buried in this used car.  The only way she can refinance is if she comes up with about $4000 to get the loan close to vehicle value.


Let me break down the $4,000 warranty she bought.  And she will be paying 18% interest on this warranty.  With interest it will cost her $6092 for this warranty. It will cover any major engine or transmission failure with a $100 deductible up to $5000 for 5 years.  Maximum payout on this warranty is less than her total cost of the warranty.  There is less than a 10% chance the engine and transmission warranty will ever be used.  Never buy an extended warranty on a used car.  Always have the used car checked out by a mechanic that is not related to the dealership.   This warranty most likely was a total waste of money for her.


The really sad part is she cannot get refinanced because of the warranty she got talked into.  If she was only $1000 upside down in her car she could pay it down and get refinanced from her credit union for between 4% and 6%.


Car buying advice.

Buying good used cars that are a third to half the new price of the car are the least expensive way to own a car.  Never buy an extended warranty for your used car.   Take the used car to an independent car repair shop to have it checked out before you buy it.  Save up until you can buy a car with cash.  

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