Car buyers are often in a dilemma as to whether they should opt for car loans or pay the entire price of the vehicle outright at the time of purchase (when they can afford the latter).
In this article, we present 5 great reasons why it makes more sense to avail car loans than to pay the entire amount upfront, even if you can afford it.
1. Low Interest Rates
Interest rates on car loans are reasonably low. If you look at the long-term trend of auto loans, you will find that interest rates have not gone up tremendously over the years, remaining fairly consistent.
If you take a picture of the entire scenario, comparing the total amount you will pay for your vehicle over the tenure of the loan versus what you will pay upfront without a loan, the difference will actually not be substantial.
2. Favourable Tradeoff with other Loans and Investment Options
As compared to most other loans and investment options, we find car loans to be quite favourable. To explain, let’s say you opt for a car loan instead of spending a significant amount on purchasing your vehicle outright. That same money, which you would have spent on purchasing your car outright, you choose to invest in a suitable investment vehicle, let’s say a Company Fixed Deposit (FD) with an assured rate of return.
In this scenario, you will find that the tradeoff will be such that you will gain from the FD as much or possibly even more than what you would have paid additionally for the car loan.
In the same scenario, should you opt for share trading using the same money, you can actually gain significantly higher than what you would pay as interest on the car loan.
Therefore, whenever you are contemplating purchasing a car outright, think about how else you could outlay the same amount of money by availing a car loan and suitably investing that sum.
3. Choice of Vehicle
Even when you can afford to buy a vehicle upfront without availing a car loan, you will only be able to stretch your budget up to a point. Beyond that, you will really be looking at limited options, since your budget will not let you consider other vehicles.
But with an auto loan, you can consider additional vehicles almost limitlessly.
Further, if you look at the difference in the EMI (Equated Monthly Installment) that you pay for say a bigger, better, and slightly costlier vehicle versus one which is smaller, inferior, and cheaper, it is really not much. This is especially true in case of longer tenure car loans where the difference in EMI particularly proves to be insubstantial.
4. Used Car Loans
As with new cars, you can secure car loans for used cars too. This allows you to purchase even better vehicles while still remaining within your budget.
Interest rates on used car loans are also fairly reasonable. Usually, you do not end up paying a lot extra over the tenure of your loan.
5. Relatively Easier Resale
Selling your vehicle that has been purchased on an auto loan is relatively easier on the pocket than otherwise. After all, you haven’t yet paid the full amount of the vehicle!
Let’s say 3 years have passed on your car loan with another 2 to go. You decide to sell your vehicle at this point. You can easily sell your car at this juncture at a reasonable price, using the funds you receive from the sale to pay off the bank, instead of digging into your own pocket.
Clearly, it makes sense to opt for car loans even if you have the money to purchase a car outright. Car loans can be extremely useful tools to help with personal finances. Just make sure that you understand the terms and rates within the car loan you choose.