Laying out a large sum of cash to purchase a car outright can place a huge burden on your checking or savings account. An auto loan will give you the advantage of buying a vehicle with monthly payments you can afford. Auto loans also help build your credit rating, provided that you make the payments on time, and give you the opportunity to buy a better vehicle that may have been too expensive if you were to pay cash.
Advantages Compared to Leasing
With an auto loan, each monthly payment you make goes toward eventually owning the vehicle yourself. When the loan is paid off, you own a piece of property. In a lease agreement, you rent a car for a specific time. At the end of your lease contract, you have the option to buy the vehicle or return it to the dealer. Auto loans do not limit the amount of miles you can drive the car before incurring costly over-mileage charges, as is the case with a lease. Another consideration is auto insurance. If you finance through a loan, the amount an insurance company will pay for damage depends on the market value of the vehicle. When a leased vehicle is damaged, the dealer's repair costs often are greater than the insurance company will pay, leaving you responsible to cover the difference.
Many companies will be happy to loan you enough money to pay off your old loan at any time, leaving you with lower monthly payments. Refinancing can save you money if interest rates have dropped since you bought the vehicle, or if your original interest rate is higher due to a previously low credit score that has improved. If you can afford your original loan payment, refinancing at a lower interest rate gives you the opportunity to apply the extra money toward paying off the auto loan faster. Unlike home refinancing, which requires a determination of property value, auto refinancing is dependent only on the amount of money you need to pay off the previous loan.
Early Payoff Advantages
Auto loans that do not charge penalties for early payoff give you the flexibility of ending the credit agreement ahead of schedule, thus saving you money on interest. An early payoff will help improve your credit score, making it easier to secure loans in the future. Completing auto loan payments ahead of time will free up money to pay for other priorities in your budget. Another advantage is to pay off an auto loan with money from another type of loan that has tax-deductible interest, such as a home equity line of credit. An auto loan company requires you to carry a certain amount of insurance coverage for the duration of the agreement. You can reduce the insurance coverage by paying off the loan early and adjusting the policy to more affordable terms.
Theresa Custodio is a Michigan-certified nurseryman with over 10 years experience. She has spent over five years working for the State of Michigan's Department of Environmental Quality writing permits and violation notices, which are published for public record. She has a Bachelor of Science degree from Eastern Michigan University with a major in biology and a minor in conservation and resource use.