pros and cons of financing a car

The Breakdown: Financing a Car – Pros, Cons, and What to Consider

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In some cases, traditional financing isn’t the best option. A small personal loan, on the other hand, might allow you to purchase a car from an individual or a car dealer. But, as with all loans, you should explore it in more detail before committing to anything. Instead of spending a large chunk of change right away on a new car, many people rely on car loans. [REDACTED] is one resource to consider when in the car-finance process; it also offers the ability to refinance your car.

When most people think of car finance, the most common type of finance that comes to mind is an auto loan. However, when it comes to car financing, there are many options to choose from. From hire purchase to personal contract plans, it can be difficult to know which type of finance is best for your loan. Make sure you know exactly what you are considering before finalizing a car loan.

Overview of Car Financing

So what is financing really like? What do you have to consider before you sign? What do you consider after you have signed? And how can you prevent yourself from being a financial statistic so quickly locked up?

On the other hand, financing a car is not free money. In fact, by the time you’re done paying for a car, usually over 6 years, you would have much preferred to have saved for it. The interest costs money and nearly doubles some of today’s car prices. Financing a car is like paying the car’s worth upfront in some cases. This may not seem like an issue to some at 35, 40, or 45 years old. With interest rates on collections and hired detectives if you fall behind, and even garnished wages. Not a pretty thought.

There are many advantages to financing a car when compared to older traditions such as saving up to pay for it. With today’s modern prices, many people just can’t afford the luxury of waiting 5 to 10 years to buy a nice car. People today have jobs, children, and life’s little extras that are always taking away from their future cars. It is quite true that many people with good credit could completely forget about obtaining a new car and just purchase a used one outright, but for those who appreciate the smoothness of a beautifully bold new car, buying a car outright is simply not most people’s cup of tea.

Financing a car can often be tricky. All those words that you hear when buying a car that you don’t understand can often get you messed up when it comes time to sign on the line. In addition to getting through this breakdown, you should always speak with your dealer. This article may be a good start, but this is your money and it should be used how you see fit, so get as much information as possible before you sign anything.

Part 1: Pros of Financing a Car

Yet another advantage of car loans is that some banks and car dealers offer zero percent financing, meaning you pay just the cost price and nothing more. This naturally is a great deal, especially when the economy is good. Many banks and financial institutions also do not require potential borrowers to make any down payments, so this is also another advantage. Nowadays, filling out the car loan applications is also very convenient. The sooner you fill out the form, the better, as you will get to know whether your application has been approved relatively quickly. From there, it’s just a matter of waiting for the check to arrive, and then using it to buy your dream car.

For most of us, financing a car is just part and parcel of the whole buying experience. Many of us are just not in a position to pay thousands of dollars for a car in full, and would need banks and financial institutions to help finance the purchase. What’s great about financing cars is that the interest rates are often very competitive, as compared to bank loans because for the former type, the car serves as collateral. Another pro is that car loans are typically spread over a number of years, usually three to seven, which means that your monthly payments would be lower, definitely much lower than if you signed up for an unsecured loan.

1. Access to a Higher-Quality Vehicle

Not all individuals are looking to purchase superior quality vehicles. However, given that some generally view a vehicle as an extension of who they are, the quality of the vehicle may be important to some. For instance, when driving up to client meetings, or when driving with family and friends, many individuals may prefer to be seen in a higher-quality vehicle. Good credit obviously goes a long way. If your credit background is good enough, you will probably find that it is not difficult to get approved for a car loan. After years of making timely student loan payments, other individuals may be looking to get a vehicle. However, this may be difficult if he or she has poor credit. In an ideal world, everyone would possess excellent credit. However, this is hardly the case. Car loans are much easier to obtain if your credit score is high.

Financing a car allows you to purchase or lease a vehicle over time by making regular installments on a loan. Similar to other personal financing options such as student loans and mortgages, the funds borrowed are paid back over a period of time, typically one to seven years. Financing a car offers some significant perks, like the ability to purchase a higher quality vehicle or the flexibility that comes with leasing. But there are always two sides to every coin. There are some drawbacks to financing your car, which we’ve outlined below.

2. Spread Out Payments Over Time

The other option you have is to take out a loan for your car. A car loan is when an individual gets a personal loan from mostly a bank or credit union and uses it to buy a car from a dealership. The loan amount is based on your credit, FICO score, and other factors. You then have to pay back the amount in fixed amounts over an agreed period of time. Car loans come with the responsibility of paying back the loan plus interest, and with a threat of repossession if you miss any payments. The last option that falls under this category is to rent a car through a lease. With car leasing, you enter into a monthly contract with a dealer to use a car, and you have to pay back the cost of depreciation plus interest. If you want to keep the car at the end of the agreed-upon period, you would have to pay the rest of the market value of the car in cash, or refinance a possible loan, or sell the car to another party.

3. Build Credit History

To the best of the ability, do everything in your power to avoid a serious delinquency/default by proactively seeking new payment arrangements with the lender, often in the form of refinancing, suspension of payments, and other special forbearance or deferment options that are tailored to financially struggling borrowers who need short-term relief. Online calculators can help you find the monthly payment and total interest costs of an auto loan or lease. By pointing your browser to the following website and keying in the price, down payment, trade-in value, and any other fees and figures associated with the purchase, such as the lease residual and money factor, you can use an online payment calculator to estimate the monthly payments and dollar interest costs. These and any other figures that you key into the calculator should be based on a realistic evaluation of what you can afford, not what you desire, and reflect the best interest rate and loan terms.

Repaying a car loan on time will help to build a good credit history. If your credit history is less than ideal or you are a young borrower new to the credit world, your chances to qualify for a car loan on your own at a good rate will improve if you can associate a co-borrower with a strong credit history to your loan. While defaulting on a car loan or surrendering the car by choice due to not being able to meet the financial obligations is damaging to your credit history, once considered carefully and having decided that this is the best course of action that will ultimately do the least amount of damage to your overall financial condition, one may choose to pursue voluntary repossession of the collateral.

Part 2: Cons of Financing a Car

Customer Service – The increase in sales through financing has increased the sensitivity of auto dealers and lessors to their customers’ needs. The decision to purchase new or used, foreign or domestic, is critical. So are the decisions concerning the options that are available, and customers are seeking their salespeople’s expertise. Another level of involvement is present when you ask the dealer or leasing company to structure the financial aspect of your purchase. The right financing can make everyone happy.

Loan Terms – Interest rates have been quite low for financing car purchases, as compared to other forms of credit. With the increased competition among both banks and finance companies to provide loans and leases, rates can be very attractive. Financing with a longer term can make these attractive arrangements even better.

Cash Flow – Contrary to cash purchases, financing a vehicle takes place over a period of time. One part of the price is distributed over a number of payments, providing a combination of usage and payment. This lets you keep cash in your pocket and generate a higher return.

Securing the appropriate financing can be a crucial factor in getting a car that suits your needs. Financing does involve future expenses, but the price’s spread-out nature can allow cash to be diverted to investments with a greater return. Leasing, a common form of financing, can provide ways to address the cash flow aspects.

1. Total Cost of Ownership

Depreciation, monthly payments, fuel, insurance, maintenance and repairs. Depreciation represents the most significant cost associated with buying a new car. The value of most vehicles depreciates the most in the first years of ownership. In fact, some experts predict that the value will be anywhere from 20 percent to 25 percent of the purchase price after one year while the value may decrease as much as 40 percent after three years. The rate of depreciation can sometimes be slowed down or the reduced cost can at least be recouped by keeping the vehicle in good condition, staying abreast of the recommended regular maintenance requirements, and having the necessary repairs completed when they arise.

Buying a Car 1 Total Cost of Ownership Louisiana has some of the highest insurance costs in the nation, coupled with high interest rates and some of the worst projections for depreciation, and the auto costs in Louisiana add up. Anyone interested in buying a car should do their homework and carefully consider all the costs associated with a new vehicle. Some of the factors to consider include: when purchasing a vehicle, the total cost of ownership is an important consideration.

2. Depreciation and Negative Equity

Depreciation and Depreciation Basics: Most cars will lose 10% of their value on the first day of ownership, and by the end of the first year, most cars have lost between 20-30% of their original value. By the end of three years, most cars have lost roughly half of their original value. By year five, most cars have lost about 60% of their original value. Once the car gets to be between 6-8 years old, the depreciation value tends to slow. The reason for this is because older cars have fewer components declining due to age, therefore the loss in value becomes minimal. On most cars, you’ll lose between 60-70% of the value from year two to year five. There are very few exceptions to this consistent loss in value. To give you an idea of how much these percentages equate to, let’s look at a $60,000 car over the course of five years. After the first year, the car has lost $10,000 even though the owner has perhaps driven the car only a few thousand miles. After five years, that $60,000 vehicle has lost over half of its value, about $33,000 down the drain. You may not feel the pain of depreciation while making car loan payments, but it affects you when you go to sell or trade in the vehicle. Keep in mind that with the car loan, you’ll also have to pay interest on the loan, so you’re losing money faster than if you had paid for the car outright (assuming you have the money). Also, the vehicle is aging, which means over time it will require more money for maintenance, gas, and parts. With a five-year-old car, all of these factors conclude why the car is worth so much less than it was when it was new.

3. Restrictions on Mileage and Modifications

Modifications restrictions for lease cars are very tight. Nothing is allowed to be done to the car, apart from perhaps installing an in-built mobile phone set adapted to use a particular car’s electrical system. Even then, this is allowable only in exclusivity with the contract hire company, as they will have to remove these items and ensure everything is standard when the car is returned to them. Any modification, whether beneficial or detrimental, that may impact on the future disposable value of the vehicle, either positive or negative, is not allowed.

These are important considerations for leasing. Mileage restrictions are commonly applied in all leasing agreements, and these can vary from 12,000 miles per year (or 36,000 over the term) all the way to 25,000 miles per year. If you go over the agreed mileage, a mileage penalty fee is imposed. If you think that your circumstances will cause you to exceed the mileage limit, you should agree another level with the finance rental company – it will be slightly more expensive, but cheaper than paying a penalty fee. The mileage level will influence the rent, but not vastly, except at extreme levels.

Part 3: Key Considerations when Financing a Car

A car loan is a high-risk loan. Car values are completely tied to their mileage. Once a car has driven off of the dealer’s lot, the value is thousands less. Due to this, lenders want to minimize the risk of you defaulting on the loan. One way that they minimize this risk is by making the loan details perfectly clear. Lenders want to see income and payment history. Most refinancing will occur at an upward adjustment to the interest. Many loans also have arbitration clauses, which will take away your right to sue the lender if there are disputes. These can be helpful and are offered to responsible consumers. However, it is important to know that a car loan is not the same as a personal loan. You are taking out a loan for an item of substantially less value, which is sure to decrease in value during the repayment period. Despite this stark difference, many loan representatives will treat personal and auto loans the same. Be sure to only take out a loan that you can afford to repay.

Financing a car can seem like a great way to break into car ownership. Sometimes, though, financing a car can be harder than making a large cash purchase. So should you finance a car? What are some normal conditions for financing a car?

1. Understanding Interest Rates and Loan Terms

Length of loan term is also a very important consideration because this affects the size of monthly payments on the car loan. The loan term is essentially the length of the contract, which is the amount of time the borrower has to pay back the lender. The longer the loan term, the smaller the monthly payments. The shorter the loan term, the larger the payments are. Longer loan terms might seem like a better choice when trying to purchase a really expensive car because of smaller payments, but longer terms for auto loans also mean that you are probably going to pay higher interest rates, a greater finance charge for borrowing the money to pay for the car. Plus, the terms available are related to the age and mileage of the vehicle. When financing, lenders want the car to be newer with lower mileage so that the vehicle serves as long as the loan servicer hopes it does, but larger, more economic dealers could offer longer loan terms.

Interest rates are a huge consideration before financing a car, as they can add up substantially over time. Interest is the cost of borrowing money from a lender and it represents profit for the lender and risk for the borrower. Interest rates are usually given as APR, annual percentage rate, which includes legally required expenses the borrower pays, such as a bank processing fee. The lower the APR, the less you have to pay on top of the cost of the car for the lending company. A higher APR means more money has to be paid in addition to the cost of the car.

2. Budgeting for Monthly Payments

Remember that when you finance a car, there are always fees. For borrowers who use a dealership’s finance office to get the money for a loan, the fees are bursting at the seams. Dealing with credit unions and local banks, on the other hand, usually carries considerably lower fees. Avoid financing these fees into the loan. Doing so means that you will be paying interest on the fees, making the car cost you even more over time. Small fees can easily increase your loan payments by 1% or more. Just think what that $6889 fee would do to a loan. With a $25,000 loan at 49% interest for 60 months, it would bring the monthly payment to $449The moral here is that financing always incorporates costs, fees are always involved, and it’s essential to shop around for the best deal.

Monthly car payments are at the foundation of your car financing. Unless you paid cash for your car, you need to ensure that these payments fit within your monthly budget. Also, make sure that your emergency fund is robust enough to handle monthly car payments for at least four months in the event of unforeseen job loss or some other catastrophic event. Buyers often forget that the cost of buying the car goes beyond the monthly payment. Regular ongoing maintenance costs (which include gas), taxes, and insurance are additional costs to consider. When you borrow money, lenders always consider all these factors before approving a loan. You should do the same. After all, you want to make sure that you are meeting your financial obligations and maintaining a clean credit history.

3. Researching Different Financing Options

Understand the language in a loan contract, and know what loans are available to an individual; these efforts will save the borrower time, money, plus frustration. Find out how much financing is needed. Having the correct down payment strategy to make a major purchase can save the borrower money, time, and frustration. Many individuals do not know what types of and how many loan or lease options are available. Learn how monthly payments are calculated in a lease and what effect steps like making a security deposit or having a high down payment significantly working in the borrower’s favor. Not knowing the language may allow an unsuspecting dealership to give the borrower the incorrect loan or lease and charge them fees or interest at rates higher than those available for their credit history. Gather the necessary information on fees and terms before signing the loan or lease. Helpful professionals can assist the borrower in understanding and finding acceptable lending options.

Gather information on how financing a car works, what types of loans or leases are available, and the fee breakdown for different types of loans or leases. This knowledge can help the borrower determine which loan or lease options are better for his or her financial situation. Phrases or terms in the loan agreement may be hard to understand or vague as a sophisticated method to charge above norm fees. One fee the borrower may not understand is a point. A point is 1% of the loan amount. It is an upfront charge and represents the rate of return the lender wants for giving the borrower the loan. The loan payment in a lease can have four major parts; all these parts combined can give the lender an attractive rate of return on his investment. As always, the borrower should find multiple sources for the information that he or she needed, even the possibility of having an independent lawyer or financial advisor look over the final paperwork.


A car purchase is a very personal decision and the product has many important and wide-reaching economic consequences. A better understanding of the economic and financial aspects of car transactions will help individuals make the best decisions with respect to ownership. There is no perfect answer as to when or if to purchase a car, or what type of car to purchase. The mix of financing choices to which a household thus turns represents a well-thought decision designed to generate the best value over time. Even though each car owner has unique tastes, needs, and financial and wealth objectives, the trade-offs involved in this important purchase should receive careful consideration. A careful and informed decision is almost certainly in the owner’s best interests, even though the strength of the emotions and status considerations attached to the car might make it difficult to remain fully objective.

Summary of Pros and Cons of Car Financing

Cons: Monthly car payment required, car can be repossessed by the lender if the buyer defaults on payments, interest must be paid on the auto loan, no flexibility if the borrower wants a different car.

Pros: The car can be driven straight away, good way to build credit score by making regular payments, new cars have warranty when mechanical issues without additional cost to the borrower.

Taking out an auto loan to buy a car has its advantages and disadvantages. If you know you’ll have regular cash to make your car payment, going for an auto loan could drive you behind the wheel of the car you want without having to pay the full cash amount upfront.

Cons: Limited cash funds when the vehicle has to be paid for in full, could buy a vehicle with mechanical issues or additional repairs resulting in more cash being paid out, car may not be worth as much as you initially paid for it, less money to work with for future projects.

Pros: Buyer owns car outright once the title is signed over, no monthly car payment, no risk of being in default.

Buying a car using cash has some important pros and cons. At the end of the day, it’s about owning something straight away and having no financial commitment hanging over you. You’re not paying out every month, but then you’re not driving a brand new car and could have mechanical issues or replacement costs in the near future.

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