If you don’t have the cash on hand to purchase a car outright, your best option is probably to look into car finance options.
A car loan is a financing agreement through which you borrow money from a financial institution to purchase a vehicle. In many cases, you’ll have between one and five years to pay off the full amount of the car, although terms may vary. The interest rate that you end up with will be based on your credit history.
If you’re thinking about getting a car loan, here are some pros and cons that can help you decide if it’s the right option for you.
Pros
Ability to drive away with a new vehicle
If you want to buy a newer model but don’t have the cash to buy it outright, a car loan is an option that will let you drive away in your new ride right when the salesperson hands over the keys. You’ll be able to access cars that you previously thought were unobtainable because you don’t need to put down all (or any) of the purchase price of the car.
Low monthly repayments
A car loan allows for low monthly repayments to contribute to vehicle ownership as opposed to a large one-off lump sum. If you do opt for a loan with lower repayments, the amount of money that you’ll be paying out each month can help you to ease into car ownership as your credit score and income grow. It’s also something that may give you more motivation to stick to your budget and pay off the full amount as soon as possible so that those small payments don’t turn into a lifelong burden.
When shopping for a loan, keep in mind that the shorter the term is, the lower the interest rate you’ll have to pay. Make sure to explore all of your online car finance options before making a decision on a lender, check out Driva to get started.
Opportunity to improve your credit score
If you can meet all of your loan repayment obligations on time and in full, you’ll be able to improve your credit score. This positive record can help boost your credit rating, potentially lowering interest rates on things like utilities, rent and other types of loans in the future.
Cons
Depreciation
It’s simple – a brand new car is going to be worth significantly less than what you paid for it after a few years. For example, if you buy a $30,000 vehicle and drive off the lot, you might only get half of that back when it comes time to sell or trade the car in. You always want to avoid owing more to the lender than what your car is currently worth.
High interest rates and fees
When you buy something with a car loan, you might end up paying not only for the cost of the item (the car) but also for interest on loans and additional fees. If your credit score isn’t perfect, expect to pay high interest rates. Because each month you’ll be paying interest and fees, in addition to paying back the actual loan, you’ll end up paying more over the duration of the loan than you would have if you bought the car outright.
The lender essentially owns your car until the loan is paid back in full
Although you’ll have complete use over your car, until the loan is paid back in full, your lender will technically retain ownership over the car. If you have a secured loan, the lender is even able to repossess your car if you can’t meet your repayment obligations.
Final thoughts
If you’re looking to buy a vehicle, but don’t have the cash on hand for it, your best option is to take out a car loan. Not only will this allow you access to cars that are otherwise unobtainable because of their high purchase price, but if all goes well with paying back the loan and maintaining good credit score records, you might even be able to lower interest rates on other loans in the future. There are some pros and cons associated with getting a car loan; before making any decisions about what type of financing agreement would work best for you or whether or not one at all is necessary it’s important to weigh these options discussed above carefully.
