Do I need a car loan?

We rely on cars to move us through life; they take us to work, on vacations, or around town to run errands. You may also need a vehicle for work to deliver packages, take tools to the job site, and complete other tasks. Whether you’re shopping for your first car or suddenly need a replacement, you need a vehicle to keep you mobile.

When car shopping, most people plan on taking out a loan, even if they can afford to pay cash. In this article, we’ll explore those reasons and discuss the pros and cons of getting a car loan.

Car Loans Explained

A car loan is when lenders give you money to buy a car, truck, or SUV, and you agree to pay them back. Before you take on a car loan, you should know your responsibilities and understand some basic terms.

Interest Rate

When you accept a loan from a lender, you are agreeing to pay them back with interest. Interest represents the bank’s profit for extending the money upfront and arranging to take a portion back each month until you repay the loan. Lenders also use interest rates to offset the risk of lending money and not receiving full repayment. The higher the interest rate, the more money you will pay over the life of the loan.

Your interest rate varies depending on your creditworthiness. Credit bureaus use a complex algorithm to assign you a credit score, which tells lenders how likely you are to repay the loan. Buyers with higher credit scores will get lower interest rates, which saves you money over the life of the loan.

Loan Term

The loan term represents the time you have to repay the loan. Auto loan terms vary. Typically, they range from three to seven years. Lenders don’t negotiate interest rates but offer various loan lengths. You can then choose which term works best.

Longer loans have lower monthly payments. As a result, many buyers look to extend the length of their loans to save money each month. You will pay more in interest over the life of a longer loan than shorter-term loans.

Do I Need a Car Loan?

The answer to this question depends on your situation. Not everyone has the cash in hand to purchase a vehicle, and even those that do sometimes opt for a car loan. If you don’t have the money in your bank account, you will need to get a loan if you want a vehicle. We suggest getting preapproved online before you begin shopping.

If you have the money to cover the cost of a car, you don’t need a car loan. You can pay for the vehicle, and it’s yours the moment you drive off the lot. Paying in cash will save thousands of dollars in interest payments and fees over the life of a car loan. Feel free to buy your car with cash if you can afford it.

However, experts don’t recommend depleting your savings for significant purchases unless necessary. If something were to happen and you needed cash quickly, having that money set aside will help.

Car Loan Pros

You will enjoy several benefits if you choose to finance your vehicle. First, you won’t pay as much, if anything, upfront. Typical car loans require some form of downpayment. However, you can trade in your old vehicle and use its value as a downpayment. In this scenario, you won’t have any upfront costs.

If you don’t have much money saved up, financing can allow you to purchase a more expensive car. For example, if you have $10,000 in your savings account, you can only afford a car under $10,000 without a loan. Remember, you must account for taxes, fees, insurance, and registration expenses.

Financing expands your options. For example, if you finance $15,000, you could apply a $5,000 downpayment on a car worth twice that and still have $5,000 left in your nest egg. At a 5% interest rate and a 60-month loan term, you would pay around $283 each month.

Getting a car loan builds equity, which is another excellent benefit. Once you pay off the loan, you own the car. You can continue driving it and enjoy no monthly payments or trade in your vehicle  for a newer model, using its value as a down payment. You can also sell the car and use that cash for other things.

If you pay your loan on time, you also build good credit. Building good credit through a car loan can help you with subsequent loans. The higher your credit score, the lower your interest rate.

Car Loan Cons

When you drive a new car off the lot, it depreciates quickly. Most new models see up to a 30% drop in value in the first year and 10%-15% for each of the next three to four years. This rapid depreciation can lead to owners getting upside down on their car loans. Upside down refers to owing more for your car than its actual value.

Getting upside down won’t automatically affect you negatively. However, you could owe money that insurance won’t cover if you get in an accident. For instance, if you owe $20,000 on your car loan and its actual value is $15,000, if you get in an accident and the insurance company deems the vehicle a total loss, they only pay your lender $15,000.

You would have to pay the remaining $5,000 to satisfy the loan. This expense comes at the worst possible time, as you probably need whatever money you have to put down on another vehicle.

Let Our Finance Center Experts Help

At Meadowland GMC, we can help you navigate the car loan process. Our finance managers have decades of experience finding the perfect loans for buyers in all credit categories. Our network of lenders lets us shop for loans for you, saving you time while finding you the best deal.

Getting a car loan will have you driving away in your dream vehicle. You can use our online payment calculator to get an idea of the type of deal you want. Then, visit our Route 6 dealership in Carmel, and speak with a financial pro.

Photo Credit: Car Loan by Got Credit is licensed with CC BY 2.0 DEED

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