Buying a car is a joyful experience, whether it is a new or an old car. There are a lot of things that hopeful car owners must bear in mind before they purchase a shiny set of wheels. Often people buy a second hand car for a new driver in the family or if it is the second car. Apart from the make and model of the car, how old it is, number of kilometres already run, ask price of the car, etc. there is another important question that the buyer must contemplate – how to finance the car?
The internet is overflowing with advice on whether one must take a loan for a used car or should one use personal funds. There are pros and cons to both aspects. It is important to understand what comes with each option and then take a decision. With the same thought we bring this brief note so that our readers can take an informed decision when facing a similar dilemma.
Pros & Cons – Take a loan
- 1. Whether new or old, cars don’t come in cheap. A loan can bridge the gap between what you can pay for and what you would like to buy. Of course there are certain costs involved but if you can comfortably repay the loan in subsequent EMIs then why not enjoy the fruits today? Basically it makes your pockets go deeper.
- 2. Let us assume you have the requisite funds to pay for a second hand car, the cost of which is 5 lakhs. However, you only make a down-payment of 1 lakh and seek a , used car loan for 4 lakhs. You invest the rest 4 lakhs in an attractive fund or another investment vehicle where it earns good returns; returns greater than that paid as interest. Here you are enjoying two-fold benefits:
Had you bought the car with the entire amount by paying for it yourself, you would have lost the opportunity of making an investment and simultaneously earning returns on it.
- 3. Proper servicing of loans and credit cards helps build a first class credit score. A healthy score is pertinent to approval of credit in future. Having an elite score makes access to funds fairly easy in future. People who tend to stay away from credit often find it difficult to get them financed when the need arises.
- 4. In the CIBIL score calculation all secured loans are considered favourably. A loan for a second hand car is also a secured loan as the underlying car is hypothecated with the lender.
- 5. The journey through life is seldom smooth and often bumpy. One cannot predict with 100% accuracy on what will happen in future. The money you save today and invest in an emergency fund shall help you to sail through choppy waters in future. If you were to spend it all today then there is a good chance that you may have to struggle to keep your head above water in future. You could also use surplus funds to pay off other existing higher interest debts instead of using to pay for a used car.
Pros & Cons – Self Finance
- 1. This has to be the obvious reason for using own funds to buy a car. No loans mean no interest paid and no additional cost. One must also note that the interest rate on loans for used cars is higher than the conventional car loans given to purchase a new car from the showroom.
- 2. The general idea is that car is a depreciating asset. It loses value with time. So this means you are losing money in two directions – in interest and in terms of value, when taking a loan for a car and that too a second hand car, which has already faced quite a bit of wear and tear. Since one has no control over the lost value, therefore one can save at least the interest paid.
- 3. When using own funds to purchase a car, whether new or old, you are the outright owner of the vehicle. When you seek funds from a credit institution you have to hypothecate the car with the lender until the loan is paid off in full. When self-financing the car is yours at all times and cannot be towed away by a lender for non-repayment of dues.
- 4. You don’t have to deal with the hassle of application forms, documentations, EMIs and all. You don’t have to face any lender inquiries and sleep easy because you are not carrying a loan burden.
- 5. The money that you would have otherwise paid as interest is now free to be invested in alternate investment products.
Jewels of Wisdom
Some people would suggest that you must use own funds to pay for the car irrespective of the CIBIL score. Here is a good reason on why you must care for your credit score even if you can pay for things in cash: life is unpredictable. A lot of people will tell you that having money in bank account puts you in control. But times are never steady. What if tomorrow you need a loan to help you? At that time a poor score could hamper your chances of getting yourself financed. There may be no time and opportunity to build your score then. It is possible you will regret not having considered taking a loan in the past to build a healthy score.
You can take a an independent call depending on the value of car, make, interest rate on loan, returns on investment etc. But never take any brash decisions without doing your homework well.