Added on October 22, 2019  The News Wheel

Is Car Financing Worth It?

Buying a car is often a necessity rather than a luxury. If you have a family, you typically need at least one car to drive the kids around and run household chores. But buying a brand-new car out of pocket is not always an option, which is where car loans come into play.

You don’t need to be a financial expert to gauge the advantages and disadvantages of a car loan.

Car loans explained

Car loans are quite simple. A lender will loan you the amount of money you need, at a predetermined interest rate, to buy a car. You will pay back the money, which includes the price of the car along with the interest, in installments over a set period of time. In most cases, the car itself will be the security against which the loan is issued or, in some select cases, some separate form of security is submitted.

Your interest rate is calculated on a number of factors including your credit score, your salary, and the make and year of the car you are looking to buy. The better the credit rating and the more recent the car model, the lower your interest rate will be. You need to work on finding a low-interest loan as the higher the interest, the more money you will be paying back.

Another way of reducing the amount of money you owe is to make a bigger down payment. If you have savings, you could use those to contribute to the down payment and reduce the overall amount of money you owe. This will also mean the amount of money you have to pay under your monthly installments will be smaller.

Pros and cons: Buying out of pocket vs. financing

To properly understand the pros and cons of a car loan, you need to know that cars are a depreciating asset. This means that the value of the asset, in this case being the car, constantly drops over time. Assets like property and stocks typically appreciate over time, while cars go in the opposite direction unless your car is a vintage collector’s item, in which case it wouldn’t be much use as a means of transportation. In fact, your car’s value goes down the second you drive it off the dealership property. 

This depreciating quality is already a bad enough reason to purchase and own a car but when you consider the fact that you also have to pay interest on top of the price of the car makes car loans even more unappealing. You’re already losing money because of the car’s depreciating nature and you’ll also be losing money in paying the interest. 

Also, under a car loan, you would technically not be the owner of the car as the lender will have rights over the car as long as the car is security for the car loan and you have made all your payments. If you are unable to make your payments, your lender is entitled to repossess the car and you lose out on your asset until you make your payments or, if enough time has passed, lapse on your loan completely and risk ruining your credit rating.

By purchasing your car out of pocket, you would own the car outright and be free to choose what to do with it, including selling without having to worry about getting approvals and waivers like you would with under a car loan. You’re also free from the burden of having a loan affect your budget and deal with lenders regularly while making monthly payments for three years or more.

However, if a car is necessary for your family or for you to get to work, then the pros and cons can only be considered if you have the funds to purchase a car out of pocket. The reality is that not many people have that kind of cash at hand and a car loan is the only way they can afford to keep a car. There is also the opportunity cost to consider as spending so much money on one purchase would mean sacrificing other expenses that require equal, if not more, attention. 

What to consider when getting a car loan

The first and foremost factor to consider when considering your financing options is the interest rate. While it is understood that it is the borrower’s attributes that have a greater bearing on interest rates, you should nonetheless try to secure the lowest rate possible. Work on improving your credit score, if you can, before speaking to borrowers as this factor has a significant impact on interest rates. You can speak to a financial consultant to learn different methods to improve your credit score.

It also helps if you can cover some of the cost of your new car by putting down a bigger down payment. This will ensure a smaller monthly installment payment, making the repayment more manageable for you over such a long period of time. It should also be noted that full financing could result in a higher interest rate and a greater chance of rejection especially if there are other signs that will make the lender uneasy and unwilling to lend the money.

Finally, before you sign anything, ask your lender about any additional fees that might be applicable to the arrangement. In fact, ask them whatever questions you can think of and make sure that whatever you’ve discussed is documented in the contract and that the interest rate and repayment schedule is in accordance with what you had intended. In short, read everything before you sign.

If you’re looking for some great car financing options, then head on over to https://www.everyday-loans.co.uk/.

This is a collaborative article.