A car loan, like any lending product, can have a positive impact on your life if managed properly.
However, if mishandled, a car loan can turn out to be a costly mistake that causes you financial and emotional stress.
So before you take out a car loan, take the time to study the various pros and cons.
The pros of taking out a car loan
The main benefit of a car loan is that it gives you immediate access to a vehicle – or a better vehicle – that you wouldn’t otherwise be able to afford.
That can be extremely valuable if you need your car for work or family commitments.
Another benefit is that it allows you to build your credit profile, assuming you make all the repayments on time.
These days, there are dozens of lenders offering several hundred different car loan products, so if you do go down that road you will have a lot of choice.
- Buy now, pay later
- Build your credit profile
- Benefit from market competition
- Interest and fees
- Risk of default
- Depreciating asset
The cons of taking out a car loan
The main drawback of a car loan – or any loan product – is that you have to pay for the privilege, in the form of interest and fees. In effect, you’re ‘buying’ money off a lender.
And there are several reasons why these costs can turn out to be higher than you expect.
If you take out a variable-rate car loan, the interest rate might increase. If you miss a repayment, or pay off your loan ahead of schedule, you might be charged penalty fees.
That leads on to another potential problem with car loans – the risk of a default. Failure to repay the loan could result in your vehicle being seized and your credit rating being damaged.
But even if you do make all your repayments, your car will lose value throughout the loan term. That’s because cars depreciate the moment they’re driven off the lot.
For example, you might buy a car for $20,000. Over the life of the loan, you might spend $25,000 in fees and repayments. But by the time the loan closes, the car might be worth only $15,000.