Loans and Lending

Buying a car with a typical auto loan is pretty straightforward. You borrow money from a bank, credit union, or other lending organization and repay it in monthly installments. The interest on the loan is paid with a portion of each payment, with the remainder going toward the principal. If the interest rate is greater, the payment will be more. As you repay the principal, you build equity until the car is totally yours at the end of the loan. You have the freedom to retain the car for as long as you want and treat it whatever you want. Modification or abuse may result in future repair expenses and a lower resale value.

Long Term Loan Alternatives

To receive a cheaper monthly payment, some automobile purchasers opt for longer-term car loans of six to eight years. Long loans, on the other hand, can be dangerous, therefore these purchasers could prefer leasing. Longer loans make it easier to get "upside-down" (owing more than the car is worth) and remain there for a long period. If you need to sell the automobile quickly or it is wrecked or stolen, the trade-in, resale, or insurance value is likely to be less than the amount you still owe.

Difficult Comparison

It's hard to form a fair comparison between a six-year loan and a regular three-year lease, for example. The bank borrower still has three years of payments to make after the lease expires, but the lessee must find another vehicle or accept the lease's buyout option. A lease can also be "subvented," or made more affordable. The automaker can either take money off the top with a special lease discount or increase the residual, or both. On a lease, an automaker may offer additional rebates not available to loan customers. Furthermore, a lease's "money factor" (interest rate) may differ from the interest rate offered on a loan, making an accurate comparison can be very difficult.