Benefits of Car Financing
If you are to buy a car, there are three options available to you. You can either apply for a car loan, lease a car, or pay cash. Each option has its own individual advantages and disadvantages. Your final decision depends on your circumstances.
A clear advantage of auto loans is that it makes money available to invest. The combination of a good credit score and lower interest rates is conducive to car finance. In this article, we discuss the plus points of car buying through an auto loan and the limitations.
Auto Financing Explained
To qualify for a car loan, the lender examines your credit scores to assess your risk level as a borrower. A good credit score can get you a lower interest rate, perhaps even as little as 0%!
You also need to consider the loan term – how long you are ready to pay for your car financing. Even though loan terms can range between three to six years and longer, five years is ideal. Remember, that although a longer term can lower the monthly payments, the interest rates may increase. An increase in the interest rate could push up the overall cost of the car–low rates are preferable.
Another important factor in fixing the monthly payment is how much down payment you want to pay. For instance, a $30,000 car with 0% down payment with an interest rate of 3.5% and a five-year term would cost you about $550 per month. However, if you give a down payment of say $10,000, with everything else constant, your monthly payment would be$370.
How Much Should I Pay?
The answer to this question is linked to how much you can afford for a car purchase. You need to make an assessment of your income and expenses. From this analysis, you can decide how much you can afford to pay per month. You also need to consider other car-related monthly expenses like fuel, maintenance, and insurance. It is a good idea to allot less than 5% of your net income after taxes to monthly car expenses. If your monthly car expenses exceed this 5%, it could hamper your ability to save.
The Investment Factor of Financing
Whether you buy a used car or a new one, investment is the main attraction of car financing.
If you pay cash, you need to save in several low-risk packets like savings accounts or bonds. A car that costs $30,000 would entail a saving of $470 per month for a three-year term at a rate of interest of 3%. If the interest rate is 0% it the monthly payment would shoot up to $500 per month. This could cut severely into your saving needs and take a heavy toll on your bank account.
The rate of depreciation is quite rapid for a new car. The value of a new car reduces by up to 20% on driving out of the lot. Within three years, the value of the same car could drop by as much as 50%! Hence, it is not cost-effective to sink hard cash into a depreciation asset that will become half its value in three years.
Today we have access to extremely low-interest rates for car loans. A low-interest rate enables you to buy a car with little or no down payment. The money that you save from a reduced down payment can be invested for potentially high returns.
It cannot be confirmed that market conditions will enable your money to grow considerably. However, historically speaking, the longer money is kept invested in the market, better are chances of reaping profits.
Availability Factor in Financing
If you go in for a car loan to buy a car, there is no period of scrimping and saving to accumulate the purchase price. You just walk into the showroom, apply for an auto loan and drive out a car of your choice! You can have a spanking-new car for little or no down payment.
The satisfaction that you get in buying new vehicles through financing cannot be quantified. Once you have made that financial decision based on your budget, you can own a new or old car immediately. If you have sufficient money to cover your monthly car payments, this is a very lucrative arrangement.
The downside of Car Financing
- Interest Factor
Other than the actual cost of the car, in financing new cars, you need to consider the total amount paid in interest. You may well end up paying thousands of dollars in interest, especially if the interest rates are high.
Moreover, it is also possible that you purchase a new car before fully paying for your old car. The result will be that you increase your total debt with the new loan. Your monthly expenses will increase due to an increased monthly car payment. You will see a sizeable gap between the value of your new car and the amount that you owe.
- Cost of Insurance
If you are availing of finance to buy a car, you may have to buy comprehensive car insurance. Even if you acquire a used car, you still have to buy auto insurance as if it were a new car. Hence, in this scenario, you have no option but to pay for increased insurance coverage.
- Fluctuation in Rate
In line with the above scenario, you have to keep in mind that insurance rates tend to increase in time. So, you may end up paying more insurance than you may have if you paid cash down.
Also, the rate of interest that is given to you depends on your credit score. A bad credit score will attract a higher rate of interest, and you end up paying more in the long run. This pushes up the total car’s value. If the interest rate is high, you will be compelled to pay a higher down payment. All of these factors make financing less appealing.
The Final Decision is Yours
There are many factors involved in buying a car to take into consideration aswell as lots of tips to getting an auto loan. The final decision is yours, depending on your circumstances and your budget. By purchasing a new car upfront, you save money in the long run. This money can be invested to generate more money. However, you need to realize that the money should be invested. This is not applicable if you use that extra money for other purposes. In such a case, you would probably be better off availing of the benefits of car financing.