Few of us can comfortably afford to pay the full cost of a new car without needing to tap into some additional funds. But before you get into borrowing money through car loans for your motor, it’s vital that you understand precisely what you’re signing up to!
What Is A Car Loan?
Whether you’re buying a shiny new set of wheels or have opted for a second-hand car, they don’t come cheap. To prevent you from having to save up enough money to be able to buy the vehicle outright, car loans allow you to borrow an agreed amount to help towards – or entirely cover – the costs.
As with any credit that you borrow, car loans charge interest rates. These change depending on the amount that you need and the length of time that you want to pay this back over. Most car loans span over three to five years, and interest rates tend to be tiered: the more you want to borrow, the lesser the interest rate.
Advantages Of Car Loans
Whereas with hire purchase plans wherein you effectively lease a car until you make the final payment, with a car loan the vehicle is yours. From the moment you drive it out of the garage, it becomes your possession. The benefit here is that, if you run into financial difficulties when managing your repayments, you can sell the car as a last resort to help cover the repayment costs.
Disadvantages Of Car Loans
Since cars quickly depreciate in value, there is a risk that, by the time you’ve repaid the total car loan, the vehicle is only worth a fraction of the amount that you paid for it. As such, if you like a new set of wheels regularly, a car loan isn’t viable for you: it’s not worth paying off the whole value of the car if you intend to sell it afterwards, as it won’t sell for a price that will cover the cost of your next car. Leasing a car is a better option in this instance.
When you sign up for a car loan, you’re taking on a substantial financial commitment. To protect yourself in the unfortunate event that the car gets written off in an accident or stolen whilst you’re still repaying it, it’s worth getting gap insurance. This type of cover pays off the difference between the value of the car and what the sum that you receive in an insurance payout.
If you’re considering going ahead with a car loan, take note that a higher credit rating will most likely land you a better deal. Check your credit rating with a reputable credit reference agency, such as Experian. Likewise, consider that paying off your car loan more quickly will save you money in the long run. While a longer-term loan will feel like you’re paying less each month, in reality, you’re paying a higher interest rate – meaning that you pay more in the long run.
You may also be interested in: The Beginner’s Guide To Loans