With new car prices remaining elevated, it appears that a growing number of individuals are contemplating vehicle financing as the optimal means to access a car.
Nevertheless, loans of any kind carry inherent risks. Although it grants you the opportunity to afford a more upscale vehicle, it also places your financial stability in jeopardy. Before embarking on a comparison of auto loans, dedicate some time to comprehending the advantages and disadvantages they bring to the table.
Pros of A Car Loan
Distributes the Cost
Buying a car outright with cash is an option that might not be feasible for many drivers. The expenses accumulate and can render it almost impractical to afford the desired vehicle. Opting for a loan reduces the initial expenditure and spreads it over time, making it significantly more attainable.
Moreover, it leaves you with funds in your account that can serve other purposes. Exhausting your savings could leave you without an emergency buffer, which might pose challenges down the line.
You Become the Owner
When individuals explore vehicle options, the leasing-versus-buying debate often arises. While leasing can provide a lower monthly expense for getting behind the wheel, it’s vital to contemplate the ultimate distinction.
Opting for an auto loan results in ownership of the vehicle, whereas leasing does not grant ownership unless you opt to purchase the lease at its conclusion. Once the loan is fully repaid, you gain complete freedom to continue using the car as you see fit and eventually sell it to recover a portion of your expenses.
Furthermore, a car being financed can be customized to your liking, even before you complete the loan payments. Such freedom isn’t available when you choose to lease.
Cons of A Car Loan
Financial Risk
Falling behind on your loan payments can result in financial difficulties. Besides negatively impacting your credit score, securing other financial products like loans or credit cards might become challenging due to a poor borrowing record. Most critically, missed payments or defaults could lead to the repossession of your vehicle.
Depreciation of Vehicle Value
In the initial year, cars can lose about 20 percent of their value. If you’re dealing with a high-interest rate, you might end up owing more on your car than its actual worth — a situation known as being “upside-down” on your loan.
Being in an upside-down car loan scenario is unfavorable. It implies that you cannot sell the car unless you possess adequate savings to bridge the gap. This circumstance could also pose challenges if you’re in an accident and the car is totaled. If you lack a policy that covers the loan payoff, your insurance settlement likely won’t cover the outstanding balance.