Whether it’s a used car or a new car, buying a car is a big buy in a household. It is for this reason that the majority of homes are moving towards a car loan solution.
The latter can be taken out with a bank, a credit agency specialized in car loans or a car dealership.
New or used car loan?
To properly choose your type of credit, it is important to take into account your choices, your needs and especially your ability to repay. A new vehicle has builder insurance but is more expensive than a used vehicle. It should be noted however that a used car marketed by a dealer of the brand can also offer a reliable guarantee.
However, a used vehicle may have hidden defects, and will undoubtedly have a shorter lifespan than a new vehicle. For an identical product, the choice of the acquisition of used or new, and therefore the type of credit will depend on your ability to repay. If you plan to sell your car, do not hesitate to inquire beforehand.
The cost of a vehicle can decrease annually by more than 15%. For this reason, it is not advisable to take a loan for too long, because you risk repaying a loan on a vehicle whose value is almost zero after 5 years. If possible, consider limiting the term of your loan to 5 years.
What about the APR of a car loan?
Still called the global percentage rate (APR), the APR (annual percentage rate of charge) is the rate that will allow you to better make your choice. It will allow you to compare the various loan offers, and therefore opt for the one that best meets your expectations. It expresses the actual amount of the loan as a percentage. It takes into account insurance costs, interest on the loan and fees.
This rate is mentioned in the pre-loan offer. It is therefore important to pay attention during your research. Some organizations often offer file fees. Remember to negotiate their free if they are not offered. To do this, help yourself with a prior loan offer from the competition. Service fees are not negotiable.
This is particularly the case of the deferral of monthly payments. These fees, however, offer some security in case of financial worries passengers. So you can choose to take more risks by paying less.
The optimal duration of a car loan
The minimum and maximum terms of a car loan may vary depending on the credit institution. In general, the minimum duration of a car loan is approximately 4 months, and the maximum duration of 7 years.
It is therefore important to choose the duration of your loan, to avoid paying a vehicle that no longer has any market value. To do this, it is important to understand beforehand the mechanism of this type of credit.
It is important to understand the influence of the repayment term on the total amount of the loan. Remember, too, that the total cost is the amount of the loan to which the cost of the loan is added, namely interest and other expenses (APR). The longer the repayment period, the higher the total amount of credit. The car loan will cost so much! The converse is also true: the shorter the duration, the less expensive the credit.
The relationship between duration and monthly payment
Loan monthly means the repayment portion to be paid on each installment. As a rule, a deadline refers to one month. Thus, the duration is divided into number of months and the cost of a monthly payment can be as follows: the overall amount of the loan divided by the repayment period.
In other words, the shorter the repayment term, the larger the amount, and vice versa, for the same cost of borrowing.
Find the right compromise
To choose the right repayment time of your loan, you have to find the ideal balance between the total amount of the loan and the cost of monthly payments. It is often advisable to opt for the highest monthly payment, without the latter representing a handicap and is higher than your monthly debt ratio, which is 33%.
In other words, opt for a high amount you can do without affecting your finances. In addition, the higher the cost of borrowing, the longer the duration. Conversely, for a less expensive acquisition like a used car, the ideal would be to move to a short loan whose duration is less than 3 years.
So remember to make your choice taking into account all the above information.