The Financial Impacts of Taking Extended Car Loans
Cars are the second most expensive purchases that people make. Taking an extended car loan might seem like a good idea, but it is quite prudent that you carefully examine the deal to make sure you are doing the right thing. While these financing options can be suitable depending on your financial situation, you need to make an informed decision so that you can safeguard your financial future.
The increasing prices of cars have led to extended auto loans. Still, people consider car ownership as a basic need due to the convenience it offers but the rising costs discourages most individuals to pay cash and taking car loans.
You owe more than the real value of the car
Under normal circumstances, prospective car buyers should seek an auto loan with the shortest repayment period. A quick loan term facilitates a fast equity buildup for the car. Having equity in your vehicle means you are not in debt and you can either sell it or make a trade in and get some cash.
This also introduces negative equity into the equation. For instance, if you trade in your current vehicle before the six-year loan is fully settled and receive some credit for the value of the car, you might still be in debt. While your dealer can easily factor in debt in your next car deal, you are still going to pay the money and rollovers could result in higher interests.
Car loans with more than 60 months attract high interests
The moment you sign up for an auto loan with a repayment term stretching over 60 months, you will pay higher interest rates. It is surprising to see that every time a buyer settles for an extended loan, they end up taking a bigger amount. This implies that they are getting a model that is more expensive and this might include several car extras but at times, they end up paying more money for a basic car.
When taking a standard car loan, the average interest rates are about 2.8% and you are expected to pay around $462 each month. On the other hand, extended auto loans come with an interest rate of about 6.8% which is more than double the regular rate. This means you are required to pay over $500 each month.
Vehicle repairs, loan payments, and high interests must be dealt with
When you’ve had a car for more than six years, it will have more than 70,000 miles on the odometer. This implies that your car will need some maintenance like new tires and brakes. To make matters worse, you might have to deal with emergency repairs that might cost you a significant amount of money. This means you will cough more money so that you can cater for the maintenance while still making payments towards the car loan. Sometimes taking an extra nation 21 loans for car repair might help but it is only advisable to take such loan only if you can arrange extra funds to pay them back.
The sad thing about interest is that you can’t get tax deductions and you are giving your cash away. As such, it is important to consider the cost of extending a car loan before you make the decision. To illustrate, if you take a car loan of $27,600 and pay in 60 months at 2.8%, you end up paying about $2,000 in interest. But if you take $30,000 and extend the loan for 72 months, the interest rises to 6.8%. This means that in the end, you will pay more than $6,000 in interests alone.
Consider your buying patterns
In the face of all the downsides of an extended auto loan, more people are using this option to acquire vehicles. Whether this is a good option for you or not depends on your car ownership habits. Average car owners tend to trade in their vehicles as soon as soon as they’ve had it for about four years. Nevertheless, there is another group of people who hold on to a car and use it until it has depreciated. Knowing your ownership traits will help in deciding the most appropriate loan for you.
If you want to change the car after every three or four years, an extended car loan might not be your best bet. You will be putting yourself in negative equity every time you make a trade in. This means that you could accumulate a lot of unnecessary debts. But when you are a long-term owner, and only want to make a fixed monthly payment you might consider an extended loan.
While the automobile industry has gone through a massive transformation to avail better cars, consumers have to pay dearly. As such, high vehicle prices make it difficult for some people to pay cash for car purchases. In an attempt to fulfill their dreams, most consumers opt for an extended car loan which can quickly put you in negative equity. As a responsible borrower, you should always buy a car that you can comfortably afford rather than giving in to the dealer.