Why You Should Use a Loan to Purchase Your Automobile

Borrowing to buy a car is the most common way most people buy a new vehicle. It's the best option to get the car you need within the shortest time. However, some say that it's best to pay cash for a car whenever possible for various reasons.

The fact is, most people don't have the ability to save enough money to buy a car entirely in cash. It's easier to save for a downpayment than it is to set aside tens of thousands of dollars, then get a car loan for the balance. There are multiple good reasons why you should use a loan to purchase your next vehicle.

Understanding an Auto Loan

An auto loan is a type of lending instrument that allows you to buy a vehicle without having the full amount up front. You apply to a lender for the cost of the vehicle and wait for approval. The lender examines your credit history, and how much money you're putting down, and bases their terms and approval on the information you supply.

The lender will offer you a repayment plan based on the term of the loan, which can be three to eight years. If you accept, the lender transfers the money to the dealership, and the dealership gives you the car to take home. The payments begin about six weeks after you initially purchased the car, and are made monthly.

Reasons to Finance an Automobile

You can purchase a car with all cash, trade in your current vehicle for credit towards a new one, or get financing to cover the cost of the vehicle. A credit card is another option for buying, provided you have enough room on the card. Here's a look at the benefits of financing your next vehicle.

Flexibility

Auto loans have repayment terms that can last as little as three years, and go up to eight with the average loan lasting five years. There are advantages and disadvantages to each repayment term, but if you plan your repayments right, you can get the most out of the car and the loan.

The longer the loan period, the lower your payments. However, the drawback is that you'll pay a lot more in interest on the loan. The solution is to pay extra whenever possible as that reduces the total amount of interest you pay. Make sure that you get a loan with no pre-payment penalty if you decide to go this route.

You may also want a longer loan as a hedge against tough times. That is, if you get into a financial bind, you can still make the loan payment and keep yourself out of trouble.

You Can Buy A Newer Vehicle

Financing can offer you the opportunity to get into a newer vehicle than if you had purchased with cash. Stretching the cost of the car over a period of time typically gives you a larger amount of money to work with at the time of sale.

It's true that it's never a good idea to finance more than you can afford, and you should stay within your budget for the monthly payment for the best outcome. However, if you're offered the opportunity to get a better car for a couple of thousand dollars more, it won't add that much to the monthly payment. In turn, you get into a nicer car that's in solid mechanical shape.

Avoids Maintenance Costs

All vehicle manufacturers are building models with engines that easily reach 200,000 miles without major mechanical issues. You still have to put in maintenance such as oil changes, brakes, and tires, but these items are relatively inexpensive and easily budgeted for. Over time, the cost of maintenance is low, the risk of a major repair even lower, and you wind up getting your money's worth out of the car.

The further benefit to buying a newer car is one of having a solid and reliable car long after the payments have ended. People are keeping their car for far longer than ever due to the fact that many models are more reliable and enjoying the lack of payments and major maintenance items. The vehicle pays itself back through long-term ownership.

Helps Your Credit Score Improve

Cars are sold to buyers on credit every day, regardless of their credit score. Those who have damaged credit will find that their options are limited in terms of how much they can finance and incur a higher interest rate. This is a drawback to financing a car with bad credit, but it can pay off with a higher credit score over time.

Making regular and timely payments on an auto loan shows the lender that you're trustworthy. Your payment history is reported to the credit rating bureaus every month, which eventually shows up as a net positive toward your score. Combine that with other timely payments, and you'll see your credit score improve.

Provided you maintain a good payment history, you may be able to refinance your loan into one with a lower interest rate. The result is a lower monthly payment and the potential for a shorter loan term.