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Buying a car is an important decision for the family. You may consider financing your car by applying for a car loan or an auto loan from a bank or a financing company. The financer will transfer the money to the dealership. Then you have to pay back the car value in addition to the interest amount during the period of the loan (tenor). Some financiers may require a down payment. The financer will hold a lien on the car as collateral.
Car loan advantages
- Financing your car by a loan would achieve the following benefits:
- You will not pay an ample amount of money upfront. Instead, manageable monthly installments will be paid.
- The real monthly burden will be declining while your future income is increasing and the inflation is reducing the real value of installment.
- Keeping your savings aside for rainy days and not to use to buy the car.
- You can also enjoy a bit better car than what you can afford by cash today. Please keep the monthly installment in line with your income.
- Obtaining a loan implies paying an extra money as interest this ranges from 4% - 6% of the car original price per year. In addition to the loan processing fees
- When a loan is obtained, the car lien will prevent you from disposing the car or traveling aboard unless the financer consent is obtained.
- If you want to pay off the entire balance of the loan, an early redemption fees will be charged.
Try to do and achieve the following:
- Decide on the tenor as per your needs and family size. Remember that selling the car earlier during the financing period entails early redemption charges.
- Search local newspapers and industry magazines for financing deals.
- Financing products vary according to the car age, your age, and the level of your proven income. Make sure you are comparing relevant deals.
- Make sure you know the processing fees and any hidden charges i.e. filing charges.
- Be aware of the money illusion represents in paying less monthly installment if you paid a down payment. What you save by paying a down payment is the interest amount of it. If the down payment is 20% and the annual interest rate is 5%, then you will be saving 1% of the car price per year. Consider this in your calculation.
- Try to get other services the financer is offering such as a free credit card or a free account.
- Apply for a limited life insurance cover i.e. the insurance policy will pay off the car outstanding debt in the unlikely events.
- Consider selling the car once you pay off the loan. The selling price would equal or exceed the interest amount you have already paid. Practically, you may end up buying the car on installments for free.
To sum up, car loans have many disadvantages but with proper understanding to the terms and by getting the other services the financier provide, a good deal is achieved.