Considering buying a new car? Luckily, purchasing a car is no longer just a dream for many people. With auto loans getting simpler and easier, it has become easy for people to finance for a car. With easy finance options available, you don’t have to worry about your budget getting compromised. However, this doesn’t mean that cars are inexpensive purchases. Additionally, there are other hidden costs, such as car insurance, road taxes, car loan interest, and more, that can inflate your expenses.
If you are taking a loan to buy a car, there are several aspects you need to take account to help minimise costs. With that in mind, we have created this guide to help you understand car finance and what you should consider before taking a car loan.
What is a car loan?
A car loan is a personal loan used to buy a car. A lender like a bank will loan the borrower the amount required to buy the car. In return, the borrower agrees to pay the loan back along with interest within a given period. Specifically, the loan is paid in monthly instalments until the amount is fully paid off.
Since a car loan is a type of personal loan, most people think that it is unsecured. That means there is no collateral when taking a personal loan. The lender loans the borrower the requested amount based on the borrower’s trustworthiness. However, with a car loan, the car itself is the collateral. So, if you fail to pay the loan, finance companies will take your car and are likely to sell it to recover the loan amount.
So, you need to be extra cautious when taking a car loan. Make sure that your credit score is good so that you can get the best car loan with a low interest rate.
Things to consider when taking a car loan
There are several factors you need to consider when taking a car loan. These factors will determine the cost of the loan as well as the interest you will have to pay.
#1 Finalise your budget
At this stage, you’ve probably already got your eyes on a specific car. Now, is it within your budget? Can you afford it? Before making any decision, you’ll need to finalise your budget and determine how much you can pay as the down payment. This will influence your car loan terms to a great extent.
If the vehicle is an expensive model, you will probably have to take a big loan. Are you in the financial situation where you can easily pay off high monthly instalments and still fulfil your family’s daily needs? Consider this aspect very well.
#2 New or Used Car
Everybody dreams of buying a brand-new car. However, used cars are also a good option when you’re working with a tight budget or are not considering buying a car as a part of your investment.
#3 Calculate the car’s resale value
It is important that you have an estimation of the resale value of your car before you buy it. You should know that the value of cars depreciates every year and if the brand stops manufacturing a particular model, the value may plummet drastically.
Car finance is a great option for those with good credit scores. But it is important that you focus on the total cost you have to pay after taking the loan rather than only factoring in the monthly payments. This will help you stay on track with your finances.