There is no doubt that the car is taken as a symbol of status in society. So, if you think of upgrading your status by purchasing a car?
But you cannot make payment at once.
There is a way to finance your desired car. Financing a car means buying a car on a loan that you repay over time.
Although financing a car is a quick and flexible approach. Still, many drawbacks are associated with financing a car which makes it an undesirable way of getting the vehicle.
Let’s discuss why financing a car is a bad idea.
1) Depreciation in the value of the car:
Unlike a house, the value of a car neither increases nor remains the same. You cannot benefit from a car in terms of payback as you benefit from a house. You probably profit when you sell a house; if not profit, you usually don’t encounter loss.
However, in the case of a car, it is unlikely to get profit; rather you encounter loss. This is because the value of a car depreciates continuously.
In simple words, the car won’t be of the same value in the future if you buy it today. When you buy a car, you know that you will get less money than what you have spent on it when you sell it.
If you buy a car through financing, its value will depreciate with time, increasing financing costs. So, you will be paying more than the car’s actual worth in the future.
Hence, depreciation is one of the factors that makes financing a car an unprofitable investment.
2) Repair Costs:
If you are interested in financing a car (especially a used car), beware of the repairs. The used car can have many issues that you must address.
If you delay these repairs, you will eventually decrease the ultimate life of the car, which can lead to loss.
These repairs may include maintenance of tires, brakes, oil changes, etc. These repairs are needed continually after a certain amount of time.
Further, you will need to make the financing payment and spend money on the repairs. This can add up to a financial burden on the person taking a car loan. So, repair costs are another crucial factor to consider while financing a car.
3) Payments on Interest:
Another important aspect of financing a car is the interest payments. If the car dealer is offering you the car with no interest, it’s an attractive deal.
However, almost every car financing is interest-based because this ultimately benefits the one who lends the car. If financiers do not take an interest, they will not be able to make a profit.
That’s why car dealers often offer you the car at a lower price just to appeal to the offer. However, in reality, they know the interest payments will benefit them in terms of profit.
If you add up all the payments with interest, they will cumulatively be far more than a one-time payment.
That’s why it is a major drawback in financing a car. So, it is better to pay at once because this can save you from paying interest on the car.
However, sometimes it can be logical to approach getting a car on financing. Let’s discuss when it’s a good idea to finance a car.
So, when financing a car is a good idea?
Financing a car is good if you think you cannot save enough money to buy the vehicle outright. Also, if the interest rate is lower, it would not cost you much higher than the original cost.
Another reason that can make financing a car a good choice is if you have invested the money that pays you back with higher interest rates than the cost of financing a car.
If you think you have plenty of money and are disciplined enough to pay interest payments on time, then you can go for car loan debt. Otherwise, it is not good to get a car for financing.
Let’s glance over the pros and cons of car financing to understand if you should really opt for the financing.
Pros and cons of financing a car
Financing a car has pros and cons, but as discussed above, the drawbacks are much higher than the pros. The major drawback is that it leaves you with a higher overall vehicle cost.
You end up paying much more than the actual worth of the car. So, usually, it is not a good idea to finance a used car.
A car is considered the second biggest symbol after a house that one can attach to himself to upgrade his status. Also, beware of the car dealers who try to trap you with appealing offers.
You must act smartly to deal with these dealers and save yourself from unprofitable deals. So, all the aspects should be considered to decide on a car purchase. Do not harm yourself by paying much more to get a vehicle quickly.
In a nutshell, think of financing a car only if you are willing to pay additional costs for the car. You will be needed to pay the payments on interest, which means more than the principal payment.
You will also need to pay for the repairs on a timely basis; otherwise, the car will end up earlier than its actual life.
Another important thing is the deprecation of cars. This symbolizes that you will be paying more than the actual value of your car at present.
Hence, only go for a car loan if you need it and do not want it. Lessen your desire to manage the financial resources you have effectively!
However, if you intend to use the car for commercial purposes like a taxi, there can be differences in analyzing the numbers.
However, still, it’s strongly advisable to keep in mind that you will need to deduct the cost of financing, the cost of depreciation, the cost of repair, and the cost of fuel to ensure effective business management.
Frequently asked questions
Is loan house financing better or car financing?
House financing is better than car financing because the house’s value is expected to increase while the car’s value is expected to decrease with time. So, it’s more logical to mortgage a house than finance.
Is there a tax impact on car financing?
Yes, if you are a business and buy a car on financing. The interest payment for the car financing can be deducted from taxable income. Hence, it’s tax efficient.
Is there an impact of car financing on credit scores?
There is a significant impact of financing on the credit score, including the following.
- If you make timely repayment for the interest and capital, it leads to an enhanced credit score.
- If you do not make timely repayment for the interest and capital, it leads to impairment of the credit score.
What are the options available for financing a car?
Different car financing options include the followings.
- A personal loan from the bank/financing companies.
- Car loan from manufacturer.
- Using a credit card.
- Finance leasing.
- Operating lease.
- Chattel mortgage.
Why do car companies offer zero-rate financing?
Have you ever noticed why car financing companies offer zero interest rates on specific cars? It’s because they want to clear their stale inventory; they want to enhance sales when the public is not interested in some specific models of the car.
So, zero-rate financing is when companies want to clear their inventory, which can be a trap. Hence, one must rethink the decision to finance a car.