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The Pros and Cons of Taking out a Car Loan

Featured image by Jose Carbajal on Unsplash

If you don’t have the cash on hand to purchase a car outright, your best option is probably to look into car finance options. In other words, you might need to take out a car loan.

A car loan is a financing agreement. In the agreement you borrow money from a financial institution to purchase a vehicle. In many cases, you’ll have between one and five years to pay off the full amount of the loan. The terms may vary, and the interest rate you end up with will be based on your credit history.

If you’re thinking about getting a car loan, whether for your business or for personal use, here are some pros and cons. Consider them carefully. They can help you decide if a vehicle loan is the right option for you.


The Pros of Taking out a Car Loan

You Can Drive Away With a New Vehicle

If you want to buy a newer model but don’t have the cash to buy it outright, a car loan is an option. When you choose to do this, you will be able to drive away in your new ride when the salesperson hands over the keys.

You can also access cars that you previously thought were unobtainable. This is because you won’t need to put down all—or sometimes even any—of the purchase price of the car.

You Will Have Manageable Monthly Repayments

A car loan allows for low monthly repayments that contribute toward full vehicle ownership. You won’t need to pay a single large sum for your car.

If you opt for a loan that has lower repayments, the amount of money you will pay out each month can help you ease into car ownership. At the same time, your credit score will go up, and you will experience better cash flow with your income.

A loan such as this may give you more motivation to stick to your budget, since you will probably want to pay off the full amount as soon as possible. After all, you don’t want those small payments to turn into a lifelong burden.

Keep in mind that the shorter the term is, the lower the interest rate will be. So make sure to explore all of your online car finance options before making a decision on a lender. For example, check out Driva to get started.

You Will Get the Opportunity to Improve Your Credit Score

If you meet all of your loan repayment obligations on time and in full, a car loan will enable you to improve your credit score. A positive record can help boost your credit rating. The long-term benefit for you is that loans you take out in the future could have lower interest rates. You might also enjoy other benefits on utilities, rent, and the like.

The Cons of Taking out a Car Loan

Your New Car Will Begin to Depreciate the Moment You Drive It off the Lot

It’s simple: After a few years, a brand new car will be worth significantly less than what you paid for it. For example, if you purchase a $30,000 vehicle, you might get only half of that back when you sell the car or trade it in. For this reason, you always want to avoid owing more to the lender than what the car is currently worth.

You Could End up with High Interest Rates and Fees

When you buy a vehicle with a car loan, you will end up paying not only for the cost of the car but also for interest on the loan. There could also be some additional fees.

Also, if your credit score isn’t perfect, you can expect to pay higher interest rates. Each month you’ll be paying interest and fees, in addition to paying back the actual loan. Therefore, you’ll end up paying more over the duration of the loan than you would have if you had bought the car outright.

The Lender Essentially Owns Your Car Until You Pay the Loan Back in Full

While you are paying on your loan, you’ll have complete use of your car. However, until the loan is paid back in full, your lender will technically retain ownership over the car. If you have a secured loan, the lender can even repossess your car if you don’t meet your repayment obligations.


Weigh the Pros and Cons of Taking out a Car Loan Before You Decide

If you’re looking to buy a vehicle but don’t have the cash on hand for it, your best option could be to take out a car loan. This will allow you access to cars that are otherwise unobtainable because of their high purchase price. If all goes well with paying back the loan and maintaining a good credit score, you might even be able to obtain a lower interest rates on other loans in the future.

There are some pros and cons associated with getting a car loan. Before making any decisions about what type of financing agreement would work best for you, or whether or not one is necessary at all, it is important to weigh your options carefully.