Financing: Convenient or Dangerous?
Updated: Mar 19, 2020
The following is an article “Financing: Convenient or Dangerous?” by Marc Primo.
So you’re ready for a new set of wheels. Congratulations! But choosing a make, model, color, and the plethora of added features that come with it aren’t the only decisions you will have to make. All banks and car dealerships offer attractive rates to make financing your car an enticing and convenient option. But what are the risks?
The convenience of financing
If you are ready to purchase a car through staggered payments with the end goal being ownership of the vehicle, then financing is the way to go. Here are the main advantages of taking this route:
Long term savings — While making payments on a monthly basis or whatever your auto financing schedule is might seem like a burden due to its regularity, looking at the bigger picture will make you realize that these recurring payments are more of an investment than an expense. Upon completion of payment, you would have actually built equity as a result of the car’s value. So unlike an expense where the money you spend is simply money spent, the money used for financing your car was merely converted into an asset, which you can convert back to cash if you decide to sell the car later on.
Customization — Once the car is fully paid, it is yours to keep forever. You can do whatever you want with it: upgrade the sound system, upsize to bigger rims, or even up the ante by adding more horsepower. With leasing, you need to return the unit in the exact same condition it was in when you acquired it. This can be frustrating, especially for those who enjoy tinkering under the hood, not to mention having to be overly cautious at all times, the same way you would when borrowing somebody else’s car.
Flexibility — Financing your car is a commitment you make to owning it and the deal is sealed the moment you make the initial downpayment. Whether you opt to pay the remaining balance in 12 months or 48 months, you are actually at liberty to sell the unit even before payments are completed, so long as you make full payment as agreed in the schedule.
The dangers of financing
Higher overall cost — Unless you are lucky enough to be offered a zero interest financing plan on a car, you will end up spending more through financing than leasing, not just because you are paying for the full amount of the vehicle, but also paying for the convenience of paying monthly installments via interest. In the end, you could spend anywhere between 10 percent to 30 percent more of the vehicle’s cost through financing compared to an outright purchase.
Loss from depreciation — Cars are notorious for dropping in value. In fact, some brands can drop from 5 to 10 percent in value the minute you drive it out of the showroom. Unlike real estate or fine art that increase in value over time, automobiles will do the exact opposite, and that is precisely one of the top reasons why those with financial savvy, who aren’t car enthusiasts, opt to lease rather than finance.