What is an auto loan? Is it a good or bad debt?
What is an auto loan? In simple words, an auto loan or a car loan is a loan taken out to buy a vehicle. When you take out an auto loan, you are paying on the vehicle price plus the interest on the principal loan amount.
Check this article if you’re thinking should you get a car loan.
a. Can an auto loan be considered as good debt?
Let us find out why car loans can be considered good.
1. Ownership of automobiles can offer great financial gain
It is definitely a matter of great pride and happiness when you own a vehicle in which you can commute regularly to work. It expands your potential employment and earning capacity in the market. Not only that, but it can also help your family members in traveling to distant places.
2. Smart buying can reduce auto depreciation
If you buy a top-notch model, such as a luxury sedan or any luxurious model, the value of your automobile will depreciate much less than a new lower-end model. Be sensible in your action and thought by looking for solid deals instead of going for something shiny.
3. Good credit can get you a good rate
Make sure that you have strong credit that will help you fetch an auto loan with a lucrative interest rate, sometimes below 5%.
4. Ease of commutation in relatively smaller cities
As you may be aware that the commutation in certain parts of the country is difficult without your own vehicle. In such a situation, it is always better to take out an auto loan which comes at an affordable price and can give you an asset to use to work.
5. Personal satisfaction is granted
Owning a car is not just a matter of requirement but it is also about the passion you have for good automobiles. It gives you the thrill and the rush to go wherever you desire. Therefore, it is not wasteful spending. It enhances your prestige in society. What more? It makes commutation smooth and fascinating.
b. Are car loans bad?
There are several arguments which state that car loans can be hurtful to your financial cycle. Car loans can be bad, because:
1. Automobiles tend to depreciate quickly
When you think of borrowing money against an asset which can easily depreciate, you are simply wasting your hard-earned money. The asset, your vehicle, will lose its value as well as it’s quality over a period of time.
2. Automobile loans may have a high rate of interest
If your credit score is not good, then you may have to pay a higher rate of interest on the car loan. So, your monthly payment on the loan will also increase.
c. How to deal with an auto loan efficiently
Here is how you should manage an auto loan.
1. Manage your credit
Your credit is the decisive factor to ascertain whether or not you’ll be able to take out an auto loan at a suitable rate of interest. With a good credit score, you will be able to obtain the loan at a lower interest rate, which means overall you’ll have to pay less for the vehicle.
2. Check your credit reports and score
Always make it a habit of reviewing your credit report before you apply for auto loans or visit a dealer. As you can get a free credit report every year take advantage of that. Ensure that your credit report looks as good as it can. Review your reports and dispute errors if any, and get them rectified. Your lenders will base their lending decision on your credit report and score.
3. Figure out how much you can spend
It is not advisable to shop for cars before having a clear idea about how much you can spend. If you like a vehicle, first check out if it’s within your budget. If it’s not, don’t opt for that vehicle. Some salesperson can befool you into believing that the car is affordable with fancy math and long-term loans. But, beware of such salespersons.
If you devote time in understanding the loan process, you would be better equipped to make healthy decisions about your auto loan. If required, you can talk to experienced people to decide which vehicle and which auto loan will suit you the best, that is, a vehicle that will require less maintenance and a loan that you’ll be able to manage efficiently.