Understanding Debt - Car Loans
First Time Visitor? Welcome
FinancialLearn.com is dedicated to finding great deals, free stuff, and promote frugal living. We are delighted to have you here.
Sound Fun? Have our articles delivered to you via RSS Feed or E-mail to be reminded of new and upcoming contests and articles.
After a house the next largest purchase that we make is a car. Cars come in all shapes and sizes, but an average new car will cost out between 20 and 25,000 dollars. Few of us have saved that amount of cash, so we have to go and get a loan to purchase the vehicle. When you buy a car you are buying something that has intrinsic value. A string have people have come together to make the car and bring it to the showroom for you to buy. They all have to be paid. You have selected to buy a car with a price tag of $25,000. You talk to the dealer, tell him you need finance and he goes with a big smile on his face because he earns some commission from the finance company. He goes to his office and you follow.
The deal
You decide in the light of existing financial commitments you would like to pay for the car over 60 months. The finance company is happy to take you on as a customer. Everyone is happy, you, the salesman and the finance company.
Stop right there
What have you let yourself in for? The salesman explains you will be expected to make repayments of$525.05 per month for the next five years. Yeah, that’s fine, you figure you can afford the payments. Besides you really need the car to get to and from work and so on. He also explains that the interest rate is 9.5%. You sign on the dotted line and take delivery of your brand new car.
What does this mean
Yep, you need to do some calculations. Are you really getting a good deal? With a few deft presses your calculator or even your cell phone informs you that $525.05 multiplied by 60 comes to a total of $31,503. You are giving the loan company their capital back. Remember the capital never even existed until you took out the loan and then an additional $6,503 for the privilege of having conjured the money out of thin air. Let’s accept it, this is how the system works. But do you have to do it this way?
Alternatives
Are you sure this is the best way of buying a new car? Maybe if you went and looked yourself you could find a repayment package at less than 9.5%; that’s a saving in itself. Often your bank will arrange a car loan at a lower interest rate. Secondly, do you need a new car at all? A car loan is considered bad debt, because cars decline and do not enhance in value. Maybe it would be a lot cheaper to buy a second hand car at lower cost, or save up and pay cash. A really astute buyer would consider purchasing a collector’s car. Unlike most models these go up in value as time goes by. Still a 1968 Mustang Convertible is probably going to come with an expensive price tag, but does that matter if you have an appreciating asset?
Related Posts
- Understanding Debt - Mortgages
- Understanding Debt - Compound Interest on Credit Cards
- How to Calculate the Amount of Interest payed on a Mortgage
- The Benefits of High-Yield Bonds
- Understanding the Debt Cycle - Credit Card Rip Off
- Mortgage Refinance FAQ
- How to Calculate your Monthly Mortgage Payment
