If it weren’t for the car loan, a buyer would have to do the payment of the car at one time. It all becomes possible because of car loan which allows the buyer to pay on monthly basis. The only thing a buyer has to do is pay some amount as down payment and rest will be financed by the lender. In doing so, many people tend to go for long-term car loans which makes it easy for them to buy a car and gives the flexibility to choose the tenure. But, this facility of choosing tenure without any collateral requirement becomes more worrisome. Borrowers are staying in debt even longer.
It definitely raised a question which is, “Why people are willing to take such long-term car loans?”
Well, there are several rational and irrational reasons behind this. Let’s get to the bottom of it. And find out what risks are associated with it.
The first reason is quite rational. Nowadays, people are keeping their vehicles longer than in the past. But, there is also the irrational reason which directly links to the rational one. Since the car loan made it easy to buy a new car. The result, people tend to focus more on the monthly payments than the overall cost of financing.
That’s why many car salesmen targeting people by using long-term car loans as a way to sell more expensive cars for a larger commission. So, before you become the victim of such strategy, it is important to consider the few risks associated with long-term car loans.
- To freshen up your memory, an automobile is a depreciating asset which loses more than 10 percent of its value the second it leaves the showroom. Also, the amount you pay over the years is bigger than the actual cost of the car. Also, if you lose your job or income source then you don’t want to be stuck with a balance which is higher than your car’s value.
- Shortfall financing is another reason why long-term car loans are riskier for borrowers. It is because the car dealers understand that more borrowers are under big long-term car loans. So, to loosen up their burden they are willing to make loans to customers to pay the shortfall on their previous vehicles. To best describe this, let’s assume your car has reduced its value to $15,000, but your loan balance is of $20,000. In that situation, some auto lenders will add the $5000 trade-in shortfall to your new car-loan balance, which even put you even deeper on your next vehicle.
- Although, modern automobiles are more reliable and last longer than the past vehicles. Despite, nowadays, people are not so patient to keep a single year for years. Instead, to follow the trend most people switch to another vehicle in just a couple of years or The result, we ended up selling our car without finishing our long-term car loan.
- As we mentioned above, in financing the car, we end up paying much more than its actual It is because, when we finance a car, we pay some sort of interest to pay the amount of car over a time of the loan. The loan period is directly proportional to the interest rate.
Final Thoughts: –
In a nutshell, we can say that long-term car loans have higher interest rates than traditional car loans. The only reason, people don’t care because they’re fascinated by the lower monthly payments but in reality, they’re paying much more than the actual cost. Bottom line is, with a long-term car loan, debt increased and most borrowers end underwater – paying more than its original value.
The only way it can be beneficial is if the customer gets the opportunity to find a long-term car loan at a very low-interest rate. Which we both know is very rare. In some cases, the borrower has the freedom to choose the type of interest rate and the interest rate will be selected on the type you are choosing. Whether it is fixed or floating.
Anyways, if you have any query or would like to share something then don’t forget to mention it in the comment section given below. We will be happy to answer all your questions.
Author Bio – Nisha Sharma
I have 7 Years of experience as a research analyst. I have seen lots of ups-down in finance market. Currently I am associated with Advisorymandi.com. It is a unique platform between advisers and traders/investors where they can easily connect with each other for stock market, commodity, and Forex market related information, guidance, and advisory etc. It is the platform which provides pragmatic and unfathomable research and advisory in the stock market, commodity market, future & options, and currency market.