Research by Freo has shown that the vast majority of loans are taken out with the aim of purchasing a car. However, it is a very bad investment. A car is necessary for many people to own. Most people do not have the opportunity to cycle or walk to work. In practice, however, it appears that many (mainly young people) purchase an expensive car, for which they get deeply into debt. A car only has a limited lifespan, so it is advisable to repay a car loan as quickly as possible.
What are loans taken out for?
In addition to borrowing for a car, popular spending goals are maintaining extra spending space, transferring other loans and financing a home renovation. If you demonstrably use the money for home renovations, the interest you have to pay is tax deductible (under certain conditions). In general, this will involve minor renovations, because expensive major renovations are cheaper to finance through a mortgage.
The danger of borrowing for a car
Based on information such as a consumer’s age and income, the bank determines how much money they want to lend. When the loan is taken out, agreements are also made about the repayment of the money. Financing a car with a revolving credit is not wise. This loan does not have a fixed term, which means there is a risk that the car will have to be replaced while the loan has not yet been repaid. A personal loan will be wiser to take out. With this loan form, the term of the loan is fixed.
Depreciation on the car
During the period that you own a car, you actually need to build up a reserve from which the next car can be purchased. You know in advance that the car will have to be replaced within an x number of years. Annual reservations for the next car plus the interest charges and repayments for the current car will be too expensive for most people. This keeps them in the same boat. The next car will also have to be paid for with a loan.
How much is the depreciation?
From the moment you pick up a new car from the dealer, in many cases you are already dropping thousands of euros compared to the new value. The car is no longer new and will become less valuable as the car ages. After a period of 3.5 years and approximately 100,000 kilometers on the odometer, you will have lost at least half of the value. For certain brands and types of cars, the depreciation will be even higher. The most stable cars at the moment are the smaller city cars. There is a lot of demand for these cars due to the tax benefits from the government.
Where is the best place to take out a car loan?
It is not wise to blindly approach the car seller himself for financing. It is better to inquire with various banks about what they can offer you. However, you should not blindly go for the lowest interest rate, you should also compare the conditions.