An auto loan can make car ownership easier. You can get one through most banks, and you can also take them out as a money lender loan. If you decide to buy a used car because it’s cheaper, you can still take out a loan to help with the purchase.
Auto loans can either be good or bad, depending on how you use it. Here are three pros and three cons of taking out an auto loan to buy a used car.
Pro: You can drive the car right away
An auto loan allows you to take the car home immediately. If you want the car sooner, taking out an auto loan is a good way to achieve this, even with a used car.
Pro: It makes owning a car more affordable
Using an auto loan, you no longer need to wait to have the full amount before the car is yours. You can take it home right away.
Also, because you don’t have to shell out the full cost of the car immediately, owning the vehicle becomes more affordable. You just have to make monthly repayments on the auto loan. If you planned this well, the repayments are well within your budget, as well as the interest.
Pro: You can build your credit score
Regularly paying down your auto loan on time does wonders to your credit score. Each repayment you make that is both on time and in the full amount improves your credit score. If you don’t miss any payments over the tenure of your auto loan, you will find your credit score to be a lot higher than before.
With this, applying for more loans in the future will be easier. More importantly, banks and lenders will give you more favourable terms.
Con: Interest payments
All loans involve a significant level of interest. This is how banks and lenders earn as you borrow money from them. Loans for large purchases like cars usually charge higher interest rates than smaller loans.
Over time, interest accumulates and adds a hefty amount to the total cost of the car. You may not like this, especially once you realise you could have used that money for other things.
Con: Long-term financial obligation
Auto loans often have long tenures, often lasting for years. Suppose you buy a used car on a five-year auto loan with monthly repayments of S$1,000. This means you have to keep paying S$1,000 every month for the next 60 months (5 years x 12 months). If you miss any payments, your credit score will suffer and you may incur late payment charges.
In case of job loss, a major hospitalisation, or any financial crisis, you may lose your ability to repay the auto loan on time. At best, you may be slapped with late payment fees and your credit score goes down. At worst, you would default and your car may be repossessed. This is always a risk you have to be willing to take with auto loans.
Con: Depreciation
Whether you buy a car brand new or used, it will depreciate over time. In fact, the car will already lose some value the moment you drive it out of the dealership. The longer you own the car, the lower its value gets.
Once you have fully paid back your auto loan, you may find the total cost of the loan to be a lot more than the current value of the car.
Conclusion
Taking out an auto loan can be a good idea for owning a used car. It allows you to use the car right away and brings down the short-term cost of purchasing it. On the other hand, you’ll end up paying more than what the car is worth, thanks to interest and depreciation. Also, the long-term financial obligation may be a challenge if any incident that will drain your budget comes along.
Overall, choose your auto loan provider wisely. Find a loan with terms that are favourable to your financial situation.
