Financing, at first glance, seems to be a great way to purchase a new or newer vehicle when you don't have the money on hand to purchase. Some people, at the same time, prefer to drive their vehicle until it is beyond repair. Financing your next car has disadvantages, just as any other method of ownership, as a vehicle almost never appreciates. Rather it is a consistently depreciating investment.
Interest Rates
Because you are borrowing money, you'll be paying the bank back for your vehicle with interest included. For example, if you got a "great" deal on a vehicle for the cost of $15,000, figured fees and tax at $1,388 and put down $2000 towards your loan amount, your total amount financed is $14,388. Paying this loan back over a span of 60 months at a rate of only five-percent your monthly payment is $271.51. The total amount paid over the term of the loan is $16,290.60---you're paying an extra $1902.60 for your car. For someone with fair to good credit, you may see a rate of eight-percent for the same loan, which would equal a higher monthly payment and a repayment amount of $3115.80 in interest. This is certainly a disadvantage of financing when you look at the total lending picture and what you are paying in the long run. Essentially, your money down barely covers interest in the first example, and in the second, your money down only paid towards interest of the loan. Neither affected the principal.
Depreciation
Your vehicle depreciates the moment you drive it off of the dealer's lot. A brand-new car depreciates thousands once you take ownership. It takes years before you're able to break even on the amount you paid and the vehicle's worth in resale or trade in. Using a used car appraisal Internet site, such as Edmunds (Edmunds.com) or Kelley Blue Book (KBB.com), check the amount of a vehicle's worth for trade or private sale in comparison to retail numbers to fully gauge depreciation. You may have to stay in your vehicle for longer than you'd like before you can sell it, even if your needs have changed. For example, if you learn you have to commute for a job and currently own an SUV (Sport Utility Vehicle), you're stuck paying for more gas than you'd like. If you start a family and own a small coupe, you may have to wait before you can purchase a larger vehicle.
Maintenance
In addition to paying your monthly payment, your vehicle will require maintenance. Many people do not consider the maintenance costs on top of monthly payments. Because you are financing to own your vehicle at some point, it is likely the vehicle you are financing will come out of its bumper-to-bumper warranty period, meaning that any repairs are your responsibility.
Market Conditions
In 2009, General Motors announced that the Saturn and Pontiac brands were discontinued. For people who own these vehicles, they have seen a larger than normal depreciation effect than ever expected. You cannot anticipate future market conditions. Even if you got a good deal on your car, you may still see the affects of a changed market when you try to trade out of or sell your vehicle. Gas prices are unpredictable as are recalls, both of which can greatly affect your vehicles worth in the long run. Financing a vehicle results in risk---you are at mercy of the economic market.
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