Purchasing a car is a big decision, with significant repercussions for both your finances and your lifestyle. Though a car loan can help you acquire your desired vehicle, financing your car purchase is not the right decision for everyone. The following article explains some of the benefits and disadvantages of taking an auto loan, and can help you understand if it is the right course for you.
TipRanks’ auto loan calculator will allow you to anticipate both your estimated monthly loan payments, as well as the overall cost of your loan. It is important to keep these figures in mind as well when making your decision.
The Benefits of a Car Loan
(1) Buying a Car: The number one benefit of a car loan is that it can help you purchase a car that you might not otherwise have been able to afford. Simply put, loans provide an amount of cash that you might not have on hand to complete a purchase. While it is somewhat stating the obvious, this financing can be the difference between driving off into the sunset in the car you want, or settling for a less ideal option.
(2) Discounted Price: Though it seems counterintuitive, you may be able to secure a cheaper sticker price by taking a loan from a car dealership. Dealerships make their profits from more than just selling cars, including by offering financing to their buyers. If you are waffling between buying a car with your savings or getting financing, ask your dealer for a price comparison. It is possible they may be able to offer you a lower selling price if you take a loan from them.
(3) Keeping Your Savings: Emptying your savings account to purchase a car is never a great idea. No one knows what is waiting around the corner, and having accessible cash reserves in case of emergencies is always recommended. You could lose your job, have a medical issue, or encounter some other unforeseen scenario which would require you to dip into your savings. You always want to ensure that this remains an option for you.
Downsides of Financing Your Car
(1) Additional Expenses: Like with any loan, lenders make money by charging fees and interest. You can visualize these added fees and how much they will add to the overall cost of the car loan by experimenting with TipRanks’ auto loan calculator. While the cost is spread out over time, these additional expenses are important to consider.
(2) Veering Off Your Budget: If you enter a car dealership knowing that you have saved $20,000 to purchase a car, you will be more likely to stay within your predefined budget. On the other hand, financing a car can allow you to purchase a car that is more expensive, and dealers usually have a vested interest in encouraging you to spend more. However, if you have defined your upper limits beforehand, your likelihood of being persuaded to buy a more expensive option will decrease.
(3) Getting Underwater: If your outstanding debt on an asset is greater than its value, you are underwater. While the concept became familiar to many homeowners following the 2008-2009 mortgage crisis, there is a fundamental difference between car loans and mortgages. Your car will immediately depreciate as soon as you begin driving, whereas a home is an appreciating asset which should eventually go up over time. Your interest payments are higher in the first years of your loan (a concept known as amortization), and therefore you are paying off your principal at a slower rate in the beginning. This can lead to your car having a value that is worth less than the amount that you owe, especially in the early stages of your loan. This means that if you decide to trade-in your car before your debt is fully paid off, you might still owe money on a car you are not even driving.
(4) Lower Trade-in Value: You never know where life might take you, and you may need to change your mode of transportation earlier than you anticipated. For instance, having another child might encourage you to purchase a larger vehicle. If you paid for your car in cash, you are the outright owner, so if you sell or trade-in your car, you will reap all of those profits. However, if you bought your car via financing–and have not yet paid off the entirety of your loan–you will only enjoy a percentage of whatever price you sell your car for.
Conclusion: Should You Take a Car Loan?
A car loan will allow you to increase your options, keep your savings, and maybe even negotiate a lower sales price. However, financing a car also comes with a number of drawbacks. The overall expenses of your loan will increase, you are less likely to stay within the confines of your budget, and you may find yourself underwater, which will make your subsequent trade-in worth less.
The TipRanks’ auto loan calculator is a useful tool to help you understand the financial contours of any prospective loan. There are additional considerations beyond the finances, however. In order to make the right choice for you, it is important to fully understand both the benefits and the disadvantages of taking a car loan.
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