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Car Loans: The Pros and the Cons

Car loans are worth it if you urgently need a car but have no cash.  But, paying cash for a car can save you loan fees and interest.

Car Loans: The Pros and the Cons

If you’re contemplating taking car loans, then you must be wondering if they’re worth it. This analysis can help you make an informed decision, so, keep reading.

Car Loans: The Pros And Cons

Car loans are worth it if you urgently need a car but have no cash.  But, paying cash for a car can save you loan fees and interest.

And, did you know that 81.2% of United States residents who bought new vehicles in early 2021 used car loans? This interesting statistic reveals the convenience of auto loans. But auto loans can also be detrimental.

So, keep reading to understand if auto loans are worth it.

Car Loans Improve Your Credit Score

You can improve your long-term credit score with timely car loan monthly repayments. And, you can increase your credit score faster if you balance the credit history length, credit mix, and payment history.

Likewise, auto loans can boost your credit history. Consequently, a good credit history positions you better if you need future loans.

Secured Car Loans Have Low Rates

Some car loans are secured loans. Hence, you use your vehicle as the loan’s collateral. As a result, you qualify for better automotive loans and lower interest rates.

Additionally, most car loans have fixed loan terms and interest rates. It’s common to get a car loan which you should repay between two and seven years. Again, depending on your lender, you can negotiate for more customized loan terms to your advantage.

Car Loans Are Convenient

Car Loans enable you to upgrade or own a car for the first time when you can’t afford it. So, if you have a good credit rate and history, you can get a car in a short time.

Fortunately, car loan lenders only loan you a car whose price resonates with your credit history. The limit prevents you from borrowing beyond your repayment capabilities.

Additionally, if your car is for business, the running costs and interest are tax-deductible. Hence, you can claim an amount resonating with the business use. This relieves you of the pressure of using your savings to repay the loan.

And while car loans have the above pros, they also have some cons:

Car Value Depreciates

The car’s value depreciates steeply. For instance, if your new car cost $40K, the depreciation begins after the odometer moves from 0 to 1. Meaning, your car loses 10% of its original value.

Again, your car’s value depreciates between 15% to 25% in the first year. By the time you’re clearing your loan in five years, the value will be below 40%. Yet, your lender will still charge you the principal amount and the interest.

Car Loans Have Long Repayments

Most lenders allow you to clear your car loan in 7years. Yet, the longer you repay the loan, the more interest you pay. And, by the time you’re clearing the loan, your car will be in such a bad state that you could be planning to replace it.

Car Loans Are Credit Risk

Car loans are a credit risk. Besides being bulky to repay monthly, car loans might inconvenience you when you have financial emergencies. Yet, delaying repaying the loan adds to the interest you’ll pay.

Furthermore, the bank owns your car until you clear the loan. So, should you default, the lender can repossess your car inconveniencing you further. Repossession also detrimentally affects your credit score.

Repossession makes it difficult for you to take loans in the future.

Make An Informed Decision

Car Loans are good if you manage them accordingly. Moreso, if you’re taking a car loan for a business car, you can have the car buy itself. It’s also safer to take a car loan which you can repay in three years.

Also, consider the car’s depreciation. Strive to repay your loan while your car is still more valuable. And, always calculate the interest and fees before you sign for that car loan.

You can use the available online calculators to calculate these costs and see if it’s worth the investment. Likewise, research different lenders and choose one with the best conditions. Avoid many credit interviews as they can lower your credit score.

Also, compare the pros and cons of different car loans. While secured car loans have lower interest rates and fees, they put your car at risk of repossession. Conversely, unsecured car loans have high-interest rates and harsh loan terms, you own the car after signing that form.

Consider the benefits of a higher purchase or chattel mortgage. Choose one that fits your financial conditions better without impacting your financial life negatively.

The views expressed in this article are the author’s own and do not necessarily reflect Financial Stand’s editorial viewpoint.

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