Considerations when Taking a Car Loan

For most of us, before owning a home, a car will be the most expensive asset we own; and just as with home purchasing, we will often require financing to enable us to make the purchase.

But what is the right way of going about taking a car loan without ending up in a debt trap or without sabotaging your other financial goals?

In this article, we will cover what to consider before taking a car loan, common mistakes people make when opting for a car loan and things to consider when deciding to take a car loan.

What to consider before taking a car loan:

         i.            What effect will opting for a car loan have on your ability to borrow in future towards your other goals such as homeownership or financing a business? For salaried people, their pay-slips can accommodate up to a certain threshold of borrowing. Ensure that the car loan will not disqualify you from future borrowing towards your dreams.

       ii.            Are you able to pay for part of the purchase price from your savings? Debt has an attached cost, so if you can reduce the amount you are borrowing, you will be saving on the interest you would payout, and you could additionally opt for a shorter long term. If planning for a future car purchase, try and save for part of the amount.

      iii.            Where or whom do you intend to borrow from? Where you get your car loan is very important as some lenders are unscrupulous with contracts designed to take advantage of the borrower. Always choose a reputable lender and ensure you understand the terms offered before accepting any facility.

      iv.            Are you financially prepared for car ownership? Other than the loan repayment, car ownership comes with several attached costs such as insurance, maintenance fees, fuel etc. Consider all these costs before deciding to take a car loan to ensure you can afford the car and will not find yourself in a financial hole.

Common mistakes people make when opting to take a car loan:

         i.            Determining the car, you will purchase based on the amount of loan you qualify for. This is somewhat a backward way of approaching the purchase as you should determine the car you want based on your needs and then try and borrow as little as possible. Remember, the loan comes with a cost (interest) and should therefore not be aiming to maximize the amount borrowed.

       ii.            Borrowing from unscrupulous lenders. Some lenders (especially ones offering very quick and seemingly very convenient services) tend to have near-impossible loan terms that take advantage of the borrower and often lead to frustration and sometimes even loss of the vehicle.

      iii.            Taking a car loan when you don’t need it. Owning a car is sometimes considered a right of passage. Because of this, you may end up finding yourself wanting to purchase a car not because you need it, but because your peers are purchasing cars. Taking a car loan when you are not financially prepared can hold you back for years from achieving your financial goals.

      iv.            Over-investing in the car purchase. As mentioned earlier, before purchasing a home, a car is often the most expensive asset most of us will own. You may therefore feel the urge to splurge on this purchase as it is a visual representation of your financial achievements. Keep in mind however that it is a depreciating asset. Do not put too much money into it – especially borrowed money.

Things to consider when deciding to take a car loan:

         i.            Be clear about why you are purchasing a car and how much you wish to spend on it. What function does it need to fulfil? Do you need it to take your kids to and from school? To make future business deliveries? Do you require it for daily use or to be used occasionally? Once you know what you need the car for, select a suitable car in terms of size, reliability, efficiency and model that falls within your desired budget.

       ii.            Keep in mind the other costs related to owning a car. Ensure you will be able to afford not only the monthly car repayments but also fueling, servicing and insuring the car. We often underestimate the costs of keeping a car running, and if you are not careful, these costs can end up crippling you financially.

      iii.            Shop around for both the car and the lender. Avoid buying the first car you see – comparison shopping is likely to get you the best deal. The same goes for selecting a lender. Ensure you do your research before selecting a lender and ensure you go for a reputable and prudent lender.

      iv.            Ensure that the loan repayments will not prevent you from fulfilling your other goals. To do this, consider the timelines of your other goals and ensure they align with your loan term. For example, will your car loan be complete by the time you are ready to buy a home in 5 years’ time?

Buying a car, especially a first car is often a very exciting time in one’s life. Other than the functionality cars offer, they are also visual indicators of our achievements and as such it is easy to get carried away and end up buying “too much car”.

Before taking a car loan, do your homework to ensure you are getting a good deal when it comes to the car loan repayments, interest rates and loan term, as well as ensuring you are selecting the car most suitable to you in terms of affordability, reliability and efficiency.

If you would like to determine if you are ready to take a car loan, check out our Financial-Check Up program HERE.