The Pros and Cons of Financing a Car
Getting a car loan can help you manage the expense and build your credit, but it also means you’ll pay more in the long run.
Written by Mary Alice Morris
Reviewed by Jessica Barrett
Buying a new car can be a lot of fun, but it also requires a lot of homework. And while there are benefits to getting a car loan, there are also disadvantages—like paying more for the vehicle in the long run.
Financing allows you to buy a car even if you don’t have the cash on hand. It helps build your credit if you make timely monthly payments, too. However, paying interest on a loan means spending more on the vehicle, and you could even find yourself upside down (aka with negative equity) for a little while.
Figuring out financing might not be as exhilarating as taking a test drive, but it is equally important. Buying a car is a major financial decision, so you’ll want to make sure such a large purchase doesn’t put you in a financial bind.
Jerry
, the licensed car insurance
broker and , can help you plan out your purchase. Read on to find out more about the pros and cons of financing a car. What are the pros and cons of financing a car?
There are benefits and disadvantages to getting a car loan. Luckily, there are also several different ways to pay for a new car:
- You can buy a car outright (if you can afford it). This means paying the full price out of pocket in a lump sum.
- You can finance a car. This means getting a loan, which you will pay back in installments with added interest.
- You can lease a car. This is basically a long-term rental agreement.
Here, we’ll focus on how you can purchase a car without paying the entire sum up front while still gaining ownership of the vehicle—which means taking out a car loan.
The pros of getting an auto loan
The table below outlines the benefits and disadvantages of financing a car:
Pros of financing a car | Cons of financing a car |
|---|---|
Allows you to buy the car without having cash on hand | Depending on your credit profile, interest rates can be high |
You can modify/customize the car before it’s paid off | You’ll be responsible for interest and fees for the loan |
Making timely, consistent payments can help build credit | The car can depreciate quickly and you may end up owing more than the car is worth for a while |
The car is yours after the loan term expires | The car can be repossessed if you fail to pay on time |
What are the financing options for getting a new car?
A
car loan
is an agreement to make monthly payments with the end goal of owning the car. The car eventually belongs to you—but by the time it’s paid off, it may have depreciated greatly in value.Here are some of the options you have for getting a car loan.
Dealership financing
Often, car dealerships will have their own financing department and offer loans to customers. This is a convenient option, and it can be processed quickly while you’re at the dealership.
It also opens up avenues for financing that may not be available elsewhere to people with less-than-superb credit.
Those benefits come at a cost, though—typically, through higher interest rates for the loan. Also, the lender will likely end up being a national company, which means you won’t have the face-to-face relationship that you get with your local bank or credit union.
Bank loan
Going to your bank for a loan can be beneficial in that it may mean working with someone who knows you and is familiar with your credit portfolio. That means they may take additional (and beneficial) personal factors into consideration when evaluating your loan eligibility.
However, banks are much more cautious when lending than most dealerships’ financing departments. They’ll carefully put together a loan package that best ensures you’ll be able to pay it off. That might mean the loan amount extended to you is less than what you desire.
Further, banks may charge higher interest rates than other lenders.
Credit union loan
Credit unions tend to offer much lower interest rates on car loans. This is in part because credit unions are nonprofit organizations.
However, a drawback of some credit unions is their accessibility (or lack thereof). Many credit unions require you to be a member to use their services. Becoming a member may entail paying a fee, opening a new account and maintaining a certain balance, or meeting other requirements.
Online car loan marketplace
Just like the online mortgage marketplace, you can now compare lots of loans using an online service, such as
MyAutoLoan
. This allows you to compare interest rates and terms from several lenders at once. But again, it lacks the personal touch of using your own bank or credit union.
Save on car insurance with Jerry
No matter how you end up paying for your new car, it’ll need car insurance coverage. And the best way to find the right coverage at a good price is with
Jerry
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car insurance
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Is financing a vehicle worth it?
It depends on your credit profile and the terms of your car loan. You’ll want to research
car loan interest rates
to make sure you’re getting a fair deal. And if your credit is an issue, there are a few things you can do to help improve your credit score
. But for many consumers, a car loan makes new car ownership possible and affordable, allowing payments by installment along with added interest.
Does financing a car hurt your credit?
Initially, it might—but making your payments on time should cause your score to bounce back. Your credit score could drop a little after taking out a car loan because the amount of your debt has increased. But if you commit to paying on time regularly, the loan could actually help build your credit score.
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