Why you should not borrow to buy a car (2024)

FAQs

Why you should not borrow to buy a car? ›

Cons of taking out an auto loan

Even if you can afford to pay cash for the car, it may not be a smart financial move. You can improve your credit score and keep your savings intact with an auto loan, especially if you avoid borrowing more than you need.

There can be legal implications, especially if your friend is involved in an accident and it's unclear who's at fault. You might be held liable, and lawsuits could follow.

Used cars can be a good fit if you're on a budget and they generally cost less to insure; however, interest rates for used car loans are often higher than for new car loans. A pre-qualification may make it easier to compare different loans and to negotiate rates and other features when you're finally ready to buy.

The more equity you have in the loan, the lower your interest rate is likely to be. The biggest risk of using your car as collateral for an auto equity loan is that if you default on the loan, your bank or lender can take possession of your vehicle to help repay your debt. Fees might also apply.

A personal loan can be a good idea to finance a used car if conventional financing isn't available or if you can't qualify for an auto loan. Rates can be higher and repayment terms shorter, compared to traditional auto loans. You may be able to avoid repossession of your vehicle if you default on a personal loan.

Generally speaking, cars purchased with a large down payment and with a short-term car loan are considered to be good debt. That's because large down payments usually mean lower interest rates. Further, a shorter loan term means you'll pay less in interest over the life of the loan.

Your vehicle will depreciate the moment you drive off the lot. A car may lose 20 percent of its value in the first year. If you have a high interest rate, you could owe more than your car is worth — what's called being upside-down on your loan. Being upside-down on a car loan is a bad situation.

They want to help the environment. Some car donors will donate a car when they decide to use public transit or rideshare instead of owning a vehicle. Often when car owners decide to reduce their carbon footprint they will donate their gasoline powered vehicle in favor of public transportation.

As long as you give the person permission and they only drive the car occasionally, there shouldn't be an issue. Accidents, however, can happen anytime. Even a minor accident can cause confusion about whose insurance covers the damage. Find out what happens when you lend your car to a family member or friend.

Is a 72-month car loan bad? ›

Because of the high interest rates and risk of going upside down, most experts agree that a 72-month loan isn't an ideal choice. Experts recommend that borrowers take out a shorter loan. And for an optimal interest rate, a loan term fewer than 60 months is a better way to go. You can learn more about car loans here.

If you choose a 96-month car loan, then you'll end up paying significantly more overall due to the higher interest rates. You also get fewer options, as 96-month car loans aren't as popular as 72-month loans. This could be an issue if you have your heart set on a certain vehicle.

What is a good interest rate for a 72-month car loan? An interest rate under 5% is a great rate for a 72-month auto loan.

As per the California Vehicle Code Section 17150, every car owner is liable for injury, death, or property damages due to the vehicle's operation by any person who has been using it with expressed or implied permission of the owner.

Credit Risk

It's also a credit risk to have car loans. Within a 5-year span, it's very likely that you're going to have at least one major financial emergency.

Each time you submit an application for a credit product, the lender you've applied with will conduct a credit check on you. Each time a lender does this, it will leave what is known as a 'hard inquiry' on your report, which can impact your credit score.

The bank may even offer incentives to financing with them if you do all your banking under their roof. When financing a car through a bank, you have the advantage of shopping around at various institutions in order to get a competitive deal or terms that best align with your budget and credit profile.

In addition, you shouldn't use loan proceeds for purchases that will violate your loan terms, which may include gambling, tuition, a house down payment, or anything illegal.

For example, auto dealers earn additional profits when they finance your loan through specific lenders they work with. They may even receive incentives to send the loans through their financing partners.

People with debt are more likely to face common mental health issues, such as prolonged stress, depression, and anxiety. Debt can affect your physical well-being, too. This is especially true if the stigma of debt is keeping you from asking for help.