Car and own house are two dreams which every individual wants to achieve during his or her lifetime, in the past as far as cars are concerned people use to save first and then purchase a car but times have changed and now people get car loans from the banks or financial institutions instantly and that is the reason why people make the decision to buy car as soon as they start to earn money from their job or business. However, car loan has to be repaid along with interest and that is the reason why you should first read the advantages and disadvantages of car loan before taking such loan from the bank or financial institution –
Advantages of Car Loan
Instant Access to Car
The biggest advantage of taking this loan is that one gets instant access to the car which he or she wants; in economics, this is called satisfaction of the wants. Hence for example if you are facing problem of transportation for you and your family and wants to immediately solve the problem than saving for 2 or 3 years so that you can purchase a car is not a solution as problem needs immediate attention and that is where car loan comes to the rescue by giving you immediate access as well as possession of the car.
Helpful in Financial Planning
It helps in financial planning because once you purchase the car by taking a loan than you know beforehand the installments you need to pay every month which makes it possible for you to manage other expenses and investments well, hence for example if your monthly installment of loan is $2000 and your monthly income is $10000 than in your mind you know that you have $8000 as disposable income and you have to manage all your expenses as well as investments with that $8000.
Consumption Push for Economy
Another indirect benefit of car loans is that it helps the economy by giving it a consumption push because due to loan facility for car more people will buy cars which in turn will result in increase in sales of auto companies thereby these companies will produce more cars which in turn will give employment as well as business opportunities to the people involved in auto sector and hence it sort of win-win situation for both consumers as well as the auto companies.
Disadvantages of Car Loan
Interest on Loan
The biggest disadvantage of car loans is that one has to pay interest on the loan amount and this interest can be half the value of the car or maybe even more. Hence for example, if you have purchased a car by taking a loan of $100000 and interest on this loan at the end of loan is $45000 than effectively ignoring the time value of money your total cost for a car is $145000. In simple words, one should take interest factor in mind before applying for car loans.
Risk of Losing Car to Bank
As long as an individual is paying installments of the loan than there is no problem but moment one defaults on the installment amount there is this risk that bank or financial institution will take the possession of car from you which can be very humiliating, besides one has to bear the loss of paying installment. Hence for example, if you have taken a loan of $100000 and you have paid $50000 in installments and after that, you default on your loan than that $50000 as well as the car will be gone.
Opportunity Cost
Owning a car is not a need rather it is a want and that is the reason why it has opportunity cost because if you take the loan from bank and instead of purchasing a car you invest that amount in equities or bank fixed deposits than you will get good returns but as far as car is concerned it depreciates in value. In simple words, one should keep in mind the opportunity costs factor also in mind while taken a loan for buying a car.
As one can see from that car loan has pros as well as cons and that is the reason why anyone thinking of taking a loan for buying a car should read above points and then take the decision whether to take this loan or not.