Find out the pros and cons of a long-term car loan.
A good car isn’t bought, it’s earned. True to these words, every car owner knows that it takes years of accumulation of their hard-earned money to finally score their dream car.
Cars are magnificent machines, magnificent but pricey! While our country has progressed by leaps and bounds, the Indian dream is still the same – to own a car. Every typical Indian family looks for ways to get their hands on their preferred car and drive it around town. However, even used cars are often too expensive for some families in the country.
This growing disparity between the resources available and the wants of the people means that many families are going towards the feasible option of long-term financing to get a hold of their desired car.
Knowing that many people including you, have this option in their head, in this article we will be discussing the option of long-term financing for purchasing a car, and the associated boons & banes.
Lots of pros are associated with long-term loan financing but we shall take a look at some significant ones that would help you decide whether you should go for it or not.
Small Monthly Payments
One of the biggest perks of a long-term car loan is that you have more time to pay the loan off. Even if the long-term finance for your used car is marked at 5 years, this equals 60 months with 60 equilateral payments.
The increase in the period of the loan is equivalent to the number of the month. Hence, the monthly payments you make for it would be way less than what you would make if the loan was for say, a 2-year period. More time means more time to pay the loan off and lesser burden on you upfront.
Get that Dream Car
You can also use this as an opportunity to avail greater benefits like buying an even expensive car that you dreamt of but never really expected to afford. You can conveniently afford that with the long-term loan because the premiums wouldn’t be as astronomical as they would have been for a shorter period.
With more time to pay off the loan, you can consider the option of refinancing down the line. If your interest rates are increasing and the monthly repayment amount has shot up, then you can refinance the whole finance plan. You can change the duration of the loan repayment. You can also lower the monthly payments further through this method and drive your dream car with zero worries!
Just like any other financial loan or investment, a long-term car loan also has its share of limitations. To make an informed decision, weighing both pros and cons is the absolute rule. Let’s take a look at all the potential cons of the extended car loan.
Long-term auto loan exposes you to lesser risk and provides longer time-period to pay the loan back therefore, the interest rates on them are higher than that on other loans. This means that you will be eventually paying more for a long-term loan than for a short-term loan.
The interest rates of long-term loans are logically kept higher. This is because the financing company/party has to wait for a longer period to get their money back in full. So, the monthly payments will be significantly less than that in short-term loans but, the interest rate is in turn higher.
In the end, you end up paying way more money with a long-term loan on your vehicle. It’s up to you to decide if driving your dream car is worth sending over a ton of free money to the lender, which you could have invested somewhere else.
Depreciation is a well-known accounting concept, which fits like a fiddle here. The concept is used to account for the decrease in the value of an asset over the period of its use. Cars depreciate a lot over their expected life and their value can fall over a matter of years.
According to the stats, a car’s value can reduce up to 20% in a year depending upon how it’s used. Setting the amount of appreciation aside, just imagine how much value would the car possess once you repay your EMIs in the long-term plan. That would definitely be a meager amount!
There could also be a time when your car’s resale value would get lower than the amount you are left to repay! We wouldn’t want that to happen and that’s the whole purpose of the next con in the list.
Negative Equity/ Underwater Situation
To all those who are alien to this term, Negative equity is a situation where your car’s net worth comes down to be lesser than what you still owe to the loan provider. This situation can be detrimental in case your vehicle gets into a big accident or gets stolen.
I bet you must be thinking about your car insurance policy now! Well, to clear the smoke, even if you have the best insurance policy, the insurer will provide the amount mentioned in the policy (IDV) and not the amount you still owe to the loan provider. It’s you who will pay the additional amount to the loan provider and that doesn’t sound like a profitable deal at all!
You owe the bank and the bank owns the car. Always remember that is the way it works! You are not the actual, legal owner of the car till you have repaid the entire loan amount to the bank. The long-term car loans benefit the bank more than they benefit you. It’s up to you to decide whether you want your prized possession to be owned by the bank for such a long time or you want to go for a short-term loan and save on interest rate too.
This is the scariest one! Take a trip to the vision-land with me for a moment. Done? Ok. So, now imagine you bought a new car. It came with a warranty of 5 years and you get it financed against a long-term loan of say 9 years. Now there are two major risk factors here.
The first one is tangible, where your car might demand major repair work down the line and the warranty is long gone. Imagine the hardship of paying the EMIs of your loan and the repair costs at the same time. Scary! Isn’t it?
The other factor is more intangible, like a natural disaster that can cause extensive damage and lead to financial losses. The COVID-19 situation is a fitting example. Many people have lost their jobs, resigned, or facing pay cuts. It’s better to opt for a loan period within which you can plan and predict.
To conclude, just like every other financial loan or investment, there are certain pros and cons associated with this method. While there is no certainty on which side outweighs the other, these pros and cons are explained here to assist you in making an informed decision. They stand regardless of whether you are buying a car from an owner or from a dealer. Choose wisely!
Also Read – Tips to Help You Choose the Best Auto Insurance