When looking for added financial assistance for your next automobile purchase, the focus will generally be on the annual percent rate (APR) meaning it can be tempting to just opt for the smallest amount of yearly interest possible. There are significant drawbacks to this strategy however and you may be better off going for something slightly more expensive.
You Might End Up Paying More
The truth is that lower interest rates generally come attached to lengthier loan terms. This means you’ll be stuck paying off your debts for far longer and will have more time for the interest to pile up over the years. To avoid paying too much in the future, use an online loan calculator to determine the total amount repaid in the end. As an example, let’s say that you wish to purchase a car worth £15,000. You have £2,000 to use as a down payment so you’ll need to borrow £13,000 to cover the remainder. The following options are available:
- 3.34% APR for a 48 month loan. Monthly payment of £289.70 and total payment of £13,905.60 (extra charge of £905.60 additional interest)
- 3% APR for a 60 month loan. Monthly payment of £233.59 and total payment of £14,015.40 (extra charge of £1,015.40 additional interest)
As you can see, you’ll end up paying around £110 more if you choose the loan with the lower interest rate. Instead of jumping on the cheapest finance option then, crunch the numbers beforehand to work out which one’s really the most affordable.
The Term Might Be Too Long
Another disadvantage of taking the cheapest loan alternative is you’ll have to make payments for a lot longer. This means your financial obligations may be drawn out for years more. If you’re the type of person who wants their credit responsibilities paid back quickly, you’ll likely want to opt for a higher interest rate with a shorter term. Compare different auto loans on sites like Leasing Options car leasing and try to minimise the costs and the financing term at the same time. In this way, you’ll reduce your debt obligations and avoid unwanted circumstances such as:
- Being forced to budget for monthly repayments for far longer
- Dealing with extra fees if you pay everything back ahead of time
- Increasing your chances of missing those additional payments
No matter what the loan, decreasing the amount of time you pay it back is highly recommended. When searching for an auto loan, compare the term with the interest rate and ensure both are balanced properly.
You May Not Be Eligible
When it comes to determining APR, lenders can sometimes look at the borrower’s history. In general, only those with positive credit records will be eligible for an auto finance plan with a low rate. This means you may not be able to take out a loan with affordable interest if you have a negative history. In truth, this stems from the fact that banks are not interested in giving auto loans to financially risky customers. Thus, if you previously failed to fulfil your debt obligations, you may be wasting your time applying for the cheapest financing plans available. Instead, talk to the lender first and see whether you’re eligible!
It May Take Longer to Build Equity
Lastly, the longer term associated with some of these lower interest rates means that you won’t build equity for a while. In layman’s terms, you’ll have to wait longer until the value of the car is higher than the amount you owe on it. This means that you won’t be able to sell the car early and cover what you still have to pay back. In fact, if you wait too long, you may end up still owing money on the vehicle you’ve just sold! Instead, it can be better to opt for a more expensive loan that you can pay off faster. This will give you the opportunity to sell it sooner if you really need to.
As you can see, a loan that offers a low APR isn’t always the best choice. There are a number of factors that come into play here and it may be better for you to choose a financing scheme with a higher interest rate instead.