5 Reasons Why Car Loan Is a Good Idea

Among the biggest personal purchases, cars and houses are the most famous ones. It’s barely possible to live a normal life without a roof over your head so mortgage loans are extremely popular. In fact, they hold second place in the American debt after student credits.

But what about cars? There are millions of people worldwide who are happy with their lifestyle even despite they don’t have a vehicle. And there are millions with active car credit, too. LendingTree reports that the US citizens owe $1.16 trillion in these loans compared to $1.5 trillion of student debt. The source reveals that Americans got 27 million new auto credits in 2018 with an average size of $32,187 and 8.35% annual percentage rate.

It seems that everyone borrows money to buy a car. And we have some proofs that it’s actually a good decision.

Purchasing a Vehicle in Credit

First and foremost, let’s figure out which car loans are available for customers. The exact approach is different for each type:

  1. Personal loan. The borrowed money used to finance the purchase. Thus, you will own the car but will have to return the loan during the repayment period.
  2. Hire purchase. A credit-like plan provided by auto dealers. You get the car but don’t own it until the entire cost is paid. Similarly, you can pay within the specified time.
  3. Here, the car never belongs to you. It’s a type of rent during which you use the vehicle paying a fixed monthly fee. Eventually, you have to return the car.

The same thing for all three options is that you spend less than the entire car’s cost, initially. In the long run, you will have to pay extra interest. Thus, loans are convenient for clients who aren’t ready to pay a lump sum but can afford regular repayments.

Advantages of Car Loans

Well, why getting a car loan is considered a good idea? It accumulates your debt and forces to return money regularly. But it has five important advantages which we’re going to review right now.

1. Distributed Costs

Generally, the overall concept of lending focuses on this point. It means that you don’t have to pay everything at once but can split expenses and cover them each month. Researchers say that average monthly payments for new cars vary between $528 and $574 for new cars and $384-$410 for used ones. With standard terms of 5-6 years, such offers look convenient. But don’t forget that you will have to return extra interest, too.

2. Financial Benefits

Probably, the best thing about buying a car with a loan is that it allows you to earn more. When a vehicle isn’t just for fun, it’s often used for work. Either you have to commute to work or use the car as a moving shop, it should be considered a tool for money-making. Thus, it improves your financial state. In this case, a loan also acts as a useful investment with significant ROI related to your salary directly.

3. Improved Credit History

Just like other loans, the mentioned one can boost your score if managed properly. Firstly, evaluate the starting conditions and make sure that you can repay regularly. Then, create a schedule and stick to it. This way, you will deliver timely payments that result in credit score improvement. Needless to say that high credit rating means better conditions for further loans. You will be able to apply for a 0% interest for the next car loan or extend your mortgage.

4. Reduced Depreciation

In a nutshell, customers always have four options: a new high-end car, a used high-end car, a new low-end car, and a used low-end car. Often, people who can’t afford top versions, buy new low-end ones that depreciate quickly destroying the investment. But when you get a loan and buy a used top-quality model, you save on maintenance greatly. It’s wiser to borrow but buy a better car than to purchase trash.

5. Zero Interest

As you remember, it’s reported that average rates are around 8%. For the customers with perfect credit scores above 720, the interest might be 5%. However, it’s also possible to find zero-interest loans! Usually, they’re delivered to experienced borrowers who apply for a second or third loan, have a flawless credit history, provide collateral, and proofs of income. While 0% offers are rare, you can find them sometimes and decrease further costs greatly.

Getting the Best Possible Loan

To find the most efficient offer, you should remember a few points:

  • It splits into the first upfront payment and further monthly transfers. Obviously, with higher initial costs, you can get lower fees and total repayments.
  • Credit score. For clients with good credit history, banks and auto dealers offer better rates. You even can find interest-free loans or get significant discounts.
  • Lending company. Choose wisely between banks, auto dealerships, credit unions, and P2P systems. Always compare offers to spot the best one.
  • Carefully check the rules to find out potential extra fees. The most popular penalties refer to late payments and early payments.

Try to get the best conditions if you’re eligible. Remember that the more you save on this loan the more you can spend on other things like investments or vital purchases.

A Word of Caution

Despite it may be a good idea to purchase a car using borrowed money, you should be careful about it. Rash and hasty decisions can result in a huge debt that you can’t afford to return. That’s why we suggest opting for a car loan if you have enough money in your emergency fund to cover unexpected expenses, can get low-interest rates down to 0%, and plan to invest the saved money to get more profits.

Always remember that loans are dangerous if they treated wrongly. Don’t borrow for recreational or unnecessary purchases. And study finance management.