Purchasing a car is one of the main reasons for taking out a loan, but if you are thinking about borrowing money to get new wheels, you need to make sure you find the best loan deal for your needs.
There aren’t very many people who can buy a new motor without needing to borrow money. But before you choose your loan, you should know exactly what’s needed to keep the costs under control. Let’s look at how car loans work.
What is a car loan
Just as the name suggests, a car loan is a loan that you get to pay for a car. You decide on the amount you want to borrow and the terms on which you want to pay it back. Most car loans are for 3 to 6 years, but sometimes longer or shorter options are available.
Interest rates depend on how much you want to borrow and your credit score. Usually, the more the vehicle costs, the lower the interest rates are. So, if you are borrowing and the amount is just under the next tier, borrowing a little more could make your loan more affordable. Of course, you shouldn’t extend yourself beyond what you can afford.
Advantages and disadvantages of a car loan
The main advantage of getting a loan to pay for your auto is that the minute you drive the car off the lot, you own it. If you choose a hire purchase (HP) plan rather than a loan, you are effectively “hiring” the car for the agreement term. You do not own it until after the final payment is made, so should you run into financial difficulties, you won’t be able to sell it.
One of the main disadvantages of a car loan is that because the car’s value will depreciate quickly, by the time you actually finish paying the loan off, your car could be worth only a fraction of the initial price you paid for it. So, if you like to update your vehicle regularly, buying might not be a great option.
You might also consider buying gap insurance. Should you be in an accident or have your vehicle stolen, gap insurance will pay the difference between what you paid for the car and what the insurance pays out.
A car loan isn’t always the cheapest way to buy an automobile. For the most part, September and March, which are the months the new number plate registrations are released, are the two months when you will see the most attractive financing deals being offered, so be sure to check the loans during these times.
Things to think about when looking to get a car loan
When it’s time to apply for your car loan, having a good credit rating will mean a better deal for you, with lower interest rates and better terms. You should check your credit rating at a credit agency like Equifax before you apply for the loan. That way, you will have a better understanding of where you stand.
You can also shrink your monthly payments when you opt to have a longer term. While this reduces your payments, you need to remember that overall you will pay more.
Which car loan is right for me?
There are many different kinds of car loans offered, so it really does pay off to do your research and then decide which one is right for you.