The Smart Way to Take Out a Car Loan

ID-100108338There seems to be a lot of chatter these days in the personal finance world on whether or not car loans are good or bad.  When we first started on our journey to financial freedom, I was very much “anti-loan”.  However, now that we’ve had nearly a year-and-a-half of straight education in the world of money, I’ve found that loans indeed can be a good thing – when done right.  Here are some reasons a car loan might not be such a bad idea if you’re in the market to purchase a new or new-to-you automobile.

1. You can find an awesome interest rate.  These are definitely the days in which taking out a car loan can be to the buyer’s advantage.  Rates these days, for most borrowers, are awesomely low.  In doing research for car loans for this article, I found rates as low as zero to two percent.  That’s next to nothing!  If you’re in the market for a car, make sure to shop around, and for car finance rates, click here.  You might be surprised at the minimal amount of interest you’ll pay by simply getting a low rate.  As an example, I called a nearby dealership to find out what the lowest rate available was.  After I gave them our credit score, they told me I could likely get a rate of 1.65%.  This would mean that, on a $10,000, 3-year-term auto loan, I would pay a total of in interest of $256.40, IF I didn’t pay the loan off early.

2.  You can invest the money you have saved for the car, and earn more.  If I did take out my mythical auto loan for that rate of 1.65%, I’m quite sure that I could find an investment somewhere that would earn my $10,000 more than $256.40 over the course of three years, provided I was willing to do my research on investments.  No, I won’t earn that in a typical liquid savings account, but there are still many safer investment alternatives that can earn me a return of higher than 1.65%.  Doesn’t it make sense in a case like that to invest the money I’d saved for my car purchase and take out a car loan?

3.  You can keep your hard-earned cash on hand for emergencies.  After you saved up a nice chunk of change like the amount it takes to pay for a car, the thought of parting with that cash can be a bit overwhelming, especially if it’s means your emergency savings or back up savings fund will then be non-existent.  Taking out a low-interest rate car loan is often a better option, as you’ll be able to keep that money in your savings account for any potential financial emergency.  In the case of the fiction $10,000 car loan, the interest amount of roughly $7.12 of month, at least to me, is worth paying for the peace of mind of knowing that I’ll still have that nice cushion of cash available should a financial emergency come up.

Only you know what’s best for your particular situation when it comes to buying your next car, but it’s important to look at the whole picture before deciding what the best way is to pay for that car.   Best of luck to you in your search!

What do you think: is financing a car always wrong?

14 comments

  1. Good post Laurie! I admit that I have started shopping around and looking at vehicles lately. I won’t be trading for a few months at least, but I will probably be trading before I’m out of debt and I will probably be taking out a loan to do it. My car doesn’t have too many miles on it but it’s starting to have some problems and being the single girl that I am, I don’t have the time or knowledge to DIY and I don’t want to spend too much in repairs on it either.

    • Laurie says:

      Oh, yes, SHNM, we’ve dumped vehicles for that same reason in the past. I think as long as you follow smart borrowing rules, car loans can be done wisely.

  2. Brit says:

    For most buyers it could be good. What got me in trouble was that I didn’t get my finances under control and financed a vehicle because I got approved for this amount. I was young and dumb. I can’t pass judgment on others who take car loans because I don’t know the story and is wrong. But if it works for you and you find a great loan I don’t see why not. We saved for our vehicle and that took a long time because we were lucky. Great post, Laurie. 😀

    • Laurie says:

      Brit, we’ve made those same dumb mistakes. The “if I can afford the payment” mentality, right?? I guess that’s why they say age comes with wisdom. 🙂

  3. My husband and I currently lease our vehicles. (*gasp!*) I’d like to get away from it, but that probably won’t be until after the next lease cycle. We were both traumatized from having “lemon” cars and neither of us want deal with the insecurity of owning our own cars and the issues that can come up. It is not the smartest financial situation, but the peace of mind has been worth it.

  4. debt debs says:

    My Mazda 2 is at 0% interest, but I can’t help but think that it somehow was all built into the initial sales price. I pay $177 every two weeks starting with an initial loan balance of $27K in Aug 2011. It’s now down to 10K and since it’s at 0% there is no incentive to pay off early. My only point is to be careful with the low interest rates and make sure you are not paying too much for the car. 😉

    • Laurie says:

      It’s hard to turn down those 0% interest rates, but you’re SO right about making sure it’s not built into the price. Always gotta be careful about those car salesmen. 🙂

  5. #3 was the huge issue for me. It turned out a couple weeks after getting my car I owed 8k in taxes. If I had used a good majority of my savings for a downpayment, I’d be very nervous right now, so I’m glad I took out a low interest loan.

  6. I buy used cars only, but if I somehow was able to buy a used car with 0% interest, I would definitely take that option and invest the money in a high interest savings account. The money of the car purchase would earn some great interest while paying the minimum car payment. 🙂

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