One of the biggest impacts when buying a car is how to pay for it. Many people opt for financing a car, as it allows them to spread the cost over a period of time instead of paying the total amount upfront. However, is financing a car a good idea for you? Maybe, or maybe not. We explore the pros and cons of financing a car, to help you make an informed decision.
Let’s Start with the Pros of Financing a Car:
- Accessibility and Affordability: Financing makes owning a car easier and faster. Most people don’t have the total amount available to them immediately, so this can allow them to pay back the car over time while gaining access to a car straight away. By breaking down the cost into manageable monthly payments, you can also afford a higher-priced car that may have otherwise been out of your budget.
- Flexibility with Payments: Car financing offers various payment options for different needs. You can choose the loan term and monthly payment amount that aligns with your financial situation. This flexibility allows you to select a plan that fits comfortably within your budget.
- Building Credit History: Taking out an auto loan and making regular payments can improve your credit history, assuming you repay the loan on time. Reliable management of your car loan highlights your ability to handle credit, which can give you extra credit when applying for other loans, such as home loans, in the future.
Now Let’s Talk About The Cons of Financing a Car:
- Interest Payments: One of the most significant drawbacks of financing a car is the interest payments. Across the loan term, the interest charges can vastly increase the total cost of the car over time. Carefully consider the interest rate proposed and the total interest paid over the life of the loan.
- Depreciation: Cars depreciate over time, and the depreciation rate can vary depending on the make and model. If you finance a new car, you might find yourself in a situation where the car’s value is less than the remaining loan balance. This negative equity can create challenges if you want to sell or trade in the vehicle before the loan is fully paid off.
- Long-term Commitment: Car loans typically have terms ranging from three to seven years. Committing to a long-term loan means you are bound to make regular payments for an extended period. If your financial circumstances change or you no longer need the vehicle, getting out of the loan can be challenging without incurring penalties or fees.
- An Additional Expense to the Total Cost of Running a Car: When considering financing a car, it’s essential to factor in the cost of interest and repayments alongside the total cost of owning a car. These include insurance, servicing, maintenance, fuel, and registration fees. Ongoing vehicle expenses can significantly impact your monthly budget and should be carefully considered before committing to a car loan.
If you need a loan because you can’t afford to purchase a car upfront, you could also consider friends and family loans. These types of loans offer a safer and more supportive way to finance your vehicle. Using a tool like Chipkie can help support the management of the loan and give the lender peace of mind. Chipkie legalises the lending arrangement with a legally binding contract, and organises and tracks repayments. Not to mention they manage all those uncomfortable money conversations. Using a tool like Chipkie will ensure that you are keeping up the repayments and paying off the loan to the agreed rate and timings, and most importantly keeping the relationship strong.
Financing a car is a personal choice that depends on various factors, including your financial situation, goals, and priorities. While financing offers accessibility, flexibility, and credit-building opportunities, weighing the potential drawbacks, such as interest payments, depreciation, and long-term commitments, is crucial.