Buying a car can be a symbol of newfound independence or a simple continuation of adult life and responsibilities based on your shifting priorities. But one of the biggest decisions you’ll need to make is whether or not to take out a loan for your new, or new-to-you, car. Here are the basics of what you need to know about car loans and if taking out a car loan is a good investment for you.
What You Need To Know About Car Loans
Car loans can seem a little complicated for the uninitiated. But at their core, these loans are just borrowed money to buy a car that you’ll pay back over a certain amount of time, along with interest and fees. However, there are a few notable differences between car loans and other types.
First, you’ll need to pay some costs upfront, called a down payment. This is the money you’re willing to spend out-of-pocket for the vehicle. A down payment is applied to the overall loan, so your overall loan total is lowered by that amount. This can also be down via trade-in, where the dealership will subtract your previous car’s worth from the loan amount.
Although it requires some savings to be spent upfront, overall this can save you a serious amount of money. This is because you won’t be paying off the total amount of the car plus interest over the course of the loan.
No matter what, you’ll need to have either some cash on hand and/or a car you’re trading in to lower the amount of the loan overall.
One of the ways you can protect yourself from getting talked into tacking on more services than you need at the dealership is by seeking car loan preapproval services. Rather than having your credit and other details run by the dealership after you decide on a car, being preapproved for a car loan involves going to a bank or credit union and having them determine the loan amount they’d be willing to lend you as well as your interest rate. This saves you time and money, as you can find out your budget and then a car that fits that budget, rather than the other way around.
Interest Rate
Secondly, you’ll need to factor the interest rate into your budget. Your interest rate is the amount you’ll pay for borrowing money, calculated from a number of factors such as your credit score and history, the type of vehicle you intend on purchasing, and the loan term. Your interest rate is also based on the principal, or amount, of the loan.
Loan Terms
Just like other loans, car loans come in a variety of term limits, though they’re most commonly set for 65-72 months. Although a longer term will give you more time to pay off the loan with a lower monthly payment, you’ll be paying the car off for longer you’ll end up spending more money because of interest.
Loans vs Buying With Cash
If you’re buying a newer car, you’re likely going to go for a loan. Financing can make things a lot easier for you at the time of purchase and down the road as well, as you’ll have more money to spend on the other necessities in your life. You’ll also be able to build your credit if you take out a loan, which can be especially useful if you have a thin or bad history of credit.
But buying in cash can also save you time. as rather than having to get approved for a loan and work out the terms, your budget is limited strictly by the amount of money you’ve saved up. However, you might be surprised to find that paying with cash can cost you more in the long run. Not only will you be taking a good chunk out of your bank account at one time, but you’ll be losing out on any interest you could’ve compounded in a personal savings account.
Either way, you’ll also need to account for dealers’ fees and other hidden expenses that might make your car more expensive than you think. But ultimately, the choice comes down to your priorities and personal finances.
If you value building your credit and having a newer and potentially nicer car, then a loan could be a good option. But if you know the exact car you want and have the means to buy it outright to avoid taking on more debt, consider buying with cash.
It Comes Down to Your Budget
Knowing your budget and the priorities in your life will help you figure out whether or not taking out a loan would be beneficial for you. It’s a process with a lot of moving parts that can be difficult to navigate, but by doing your research, you’re one step closer to driving off the dealership lot in your new car.