What Are the Pros and Cons of Financing a Car?

A car loan can help provide money to buy your dream car.

Loans can have a positive impact on your life, but if not handled properly can turn out to be a massive financial mistake.

Before entering into any loan agreement, it’s essential to know what you stand to benefit and the possible difficulties that come with it.

Read on to consider the pros and cons of a car loan, so you can determine whether or not you need one.

The Pros of a Car Loan

Most Americans do not have the money to fund their dream car instantly, so they’ll need a loan.

Below are the main reasons why getting a car loan may be a great idea.

 

Access to cash to buy a car

The most significant benefit of a car loan is that it provides instant funds to buy a car – which you may typically not be able to afford unless you saved for years.

This is extremely helpful, especially if you have an immediate need for the vehicle for work, family commitments, or to drive around town.

Postponing the purchase of a car for your work or business can affect productivity, and with a car loan, you can muster the necessary funds to make the purchase.

 

It builds your credit profile

Just like most loans, obtaining a car loan can increase your credit score. Your loan payments are reported to the credit bureaus and are considered when computing your score.

However, your score only increases if you make your payments on time, so it’s essential always to repay your loans when they’re due.

 

Huge market competition

Several lenders are selling different car loan products so that you’ll get a massive range of choices.

You’ll be in an excellent position to assess each lender to determine the right one for you. You will, however, be in a better place if your credit score is in great shape.

 

Lower interest rates

Car loans typically come with lower interest rates. Since the loan is for the purchase of an asset which would also serve as collateral, the lenders will lower the associated interest rate.

The lender would hold a lien on the car until the loan is fully repaid.

This way, they can recoup their money by repossessing and selling the car if you fail to make the payments.

 

It frees money for other things

An auto loan allows you to afford a vehicle without cutting into your monthly budget.

Taking a car loan frees up money for paying off your refinanced title loan or double up on that credit card payment.

Instead of investing all your income or savings into buying a car and starving yourself of funds to meet other needs, you can take out a loan and pay gradually.

 

The Cons of a Car Loan

In an ideal world, the lender borrows your money, and then you repay when it’s due, and everyone is happy.

But this isn’t the perfect world. Your plans don’t always go as smooth as they should, and your car loan can turn out to be a considerable burden.

Here are some disadvantages to taking a car loan.

 

Interest and fees

One of the significant drawbacks of car loans and any other loan are the interest rates and fees. When combined, you may end up paying way more than the standard cost of the vehicle.

If you take the loan on a variable interest rate, you may end up paying more if the market rates increase.

Apart from the interest rate, you may have to pay penalties when you miss a payment or pay your loan ahead of schedule.

For instance, if you get a $50,000 loan to buy a car, you could end up paying up to $70,000 in interest and fees, and even more, if you don’t pay your loan on time.

 

It can reduce your credit score

Just as paying your car loans can build your credit score, late or non-payments of your loan would affect your score negatively.

Having a bad credit history can limit you in many ways. It will affect you when you are searching for employment, applying for a mortgage or the next time you intend to borrow.

 

The risk of losing your car

As stated earlier, a car loan is secured by the underlying asset (the car). In other words, the lender still holds the ownership of the vehicle by the lien.

Technically, buying a car with a car loan is just like renting the vehicle from the lender until the loan is fully repaid.

During the life-span of the loan, you risk losing the car to the lender if you default on your payments for the number of times stipulated in your contract.

Usually, it’s three times before you would be required to pay the full balance of the loan or the lender repossesses the car and sells it to regain the money.

 

The effect of depreciation

All assets depreciate with time and vehicles are not left out. In general, a car starts depreciating the moment you drive it out off the car lot.

The longer your car loan term, the more the car loses its value. So when you finally complete the loan repayment, the car could have lost a lot of value.

For instance, let’s say you obtain an auto loan of $50,000, with a total repayment of $70,000 in 60 months. When you pay off your loan, your car might be worth as low as $20,000.

 

The Bottom Line on Car Loans

Taking out an auto loan, just like any other endeavor in life, has its advantages and disadvantages. It’s up to you to consider the pros and cons of a car loan and make a decision based on your current situation.

Hopefully, this guide will help you see things from a better perspective and enable you to make the right decisions.