Many Complex Issues
Auto loans are designed to make it possible for individuals who couldn’t regularly afford a new car to have one. You’re paying a monthly amount with an interest rate until the vehicle is yours. This tends to take about 72 months.
That’s six years. Before interest, you may be looking at 64 months; but the amount you pay increases over time. Basically, you’re paying a small fee to take more time to cover the cost of your new vehicle.
If including interest overall, you pay $500 a month for your new car, you’ll have paid in $36,000 by the end of six years, or about $6k a year. That is definitely a commitment. Still, for some people, this is the best way to acquire a vehicle. Everyone is different. Here, we’ll briefly cover five considerations to help you make the best choice possible.
1. Interest Increases Total Cost
This was referenced earlier and deserves a closer look. Interest expands what you ultimately pay for a new car. For a loan amount of $30k at 5% interest over 60 months, you’re looking at $566+ a month, and a grand total of $3,968.22 in interest.
So if your downpayment on a $32k car were $6k, your $30k loan would include roughly $4k in interest. Here’s an interest calculator you can play with to get a better idea of what costs are going to be when you factor in interest.
2. Credit Can Affect Your Interest Rate
The worse your credit, the higher your interest rate. The better your credit, the lower your interest rate. Credit rates do not always have something to do with your personal acumen as regards money; sometimes they have to do with the level of debt you have, and how regularly you make payments.
3. Ask Lenders About Early-Pay Penalties
Determining your buying power can be complex, and if you don’t pay your loan off in the protracted period as regards the loan itself, you could be subject to early-payment penalties. These will depend on your personal credit, and the lending agency.
You definitely want every advantage you can get, this auto loan guide has very useful information you may want to consider; make any decision regarding such issues with the most information you can secure.
4. Used Car Auto Loans Exist At Higher Interest
Many buyers don’t realize it, but you can finance a used vehicle as well—though if you do that, your interest rate is going to be very high indeed. This is because used vehicles have less inherent value than new ones, and used car dealers have to protect their interests; as do lenders. Accordingly, used vehicle financing involves higher interest rates.
5. Owing To Depreciation, Vehicular Value Drops Fast
On that note, used vehicles have already depreciated substantially; but the value of new vehicles falls incredibly fast. The second a new car rolls off the delivery truck, its value diminishes.
If you’re putting 15k miles a year on your vehicle, that’s 90k miles by the time you pay it off in six years. A new car may be less than half its MSRP value off the lot by the time you fully own it if you finance. Financing cars builds very negligible equity, except, perhaps, for enhancing credit scores if you pay everything off on time.
Getting The Best Deal On Your Next Vehicle
Depreciation, used car interest rates, early-pay penalties, personal credit, and total accumulated interest represent five of the most important factors to consider as you go about financing a factory-new car. For many car buyers, these details make it so buying new isn’t worth it. However, for some, this is the most ideal solution.
Which quality characterizes your position will depend on your financial situation. Whatever you do, don’t just sign on the dotted line because you like the car. Be sure you can not only afford the vehicle in question, but you understand what you’re signing up for in advance.
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