While a car loan can make buying a car more affordable, you don’t want to rush into it. It’s important to weigh up the pros and cons, and speak to a finance specialist, before taking on this financial responsibility.
Pros of car loans
There can be numerous benefits to taking out a car loan which can make it a good option for many people.
Get your vehicle sooner
One of the main benefits of vehicle finance is immediacy. A car loan allows you to buy a vehicle sooner than if you had to save up the full purchase price. And unlike a home loan, car loans often don’t require a deposit.
As you don’t have to pay anything upfront this allows you to buy a car without dipping into your savings. This frees up more of your finances for other important expenses.
If you need a vehicle for work or family commitments, taking out a car loan means you don’t have to wait to get the vehicle you need.
Upgrade to the vehicle you need
With vehicle financing, you are more likely to be able to buy a better vehicle than you otherwise would be able to pay for outright.
Car loans can be used to buy a new or used vehicle, so you can choose the right car to suit your needs. Though when buying a car with a loan, it’s important to ensure you don’t borrow beyond your means. You need to be able to afford repayments and interest costs over the lifetime of your loan without putting a strain on your finances.
Allows you to build your credit profile
If you’ve never taken out a loan or credit card before, you may not have much of a credit history. A car loan can help you build or improve your credit history.
Building a good credit history can benefit you with future financings, such as a home loan. Paying off your car loan repayments on time will improve your credit rating and potentially help you get better rates on future loans.
Tax benefits for business vehicle
If you need a car for business purposes, some financing options come with tax benefits.
A chattel mortgage gives you ownership of the car at the time of purchase. This means you can claim the vehicle as a taxable offset. You can also claim the GST on the purchase price, the depreciation of the vehicle and the interest charge on the loan.
A novated lease is an agreement in which your employee pays the loan repayments straight from your pre-tax salary. This reduces your taxable income.
Cons of car loans
While vehicle finance offers many benefits, it’s important to carefully consider the potential disadvantages of taking out a car loan, and ensure it’s the right financial decision for you.
When taking out a loan, paying interest is unavoidable. With interest, you’ll end up paying more for your car loan than if you’d bought it outright.
Interest can add up to a significant amount, so getting the lowest rate you can is beneficial. The interest rate on your car loan can depend on the lender, the value of the vehicle, the amount you’re borrowing, and your credit history. A good credit rating can help you get better interest rates on your loan, and it’s beneficial to seek advice from a finance specialist, who can help you find a loan with the best possible rates.
Depreciation of vehicle
Cars can depreciate quickly over the first few years, and depending on the term period of your loan, this can mean your vehicle has lost much of its market value by the time the loan term ends.
In some cases, you could end up owing more on the car loan than the vehicle is worth by the end of the loan term, which can make it harder to sell the car later on.
Risk of default
A car loan is a significant financial responsibility and one that should not be taken on lightly. You need to ensure that the loan you apply for suits your budget and that you will be able to keep up with loan repayments and fees for the duration of your loan term. Defaulting on your loan can have serious consequences.
Two types of car loans are an unsecured loan and a secured loan. An unsecured loan means that you do not need an asset, such as a vehicle, to be held as security for the loan. This can offer greater flexibility, though often higher rates, as there is more risk to the lender.
A secured loan offers the most competitive rates and repayments, however, the car is held as security for the loan. This means that if you default on your loan and are unable to make payments, your vehicle could be seized.
There are many advantages and potential disadvantages to taking out car finance, which is why you must choose the right car loan to suit your needs and budget. Contact the team at All Loans for professional assistance with your auto finance needs.