It may seem a great idea to take out a 100% to buy an auto. If your credit score persuades a lender that you can repay in full, then you get your new auto without having to spend any money until the repayments start. Just because lenders are happy, it does not necessarily mean such a loan is in your best interests. Remember that the recession was caused by the availability of easy credit with many people getting 100% loans on real estate that was expected to continue to increase in value. In the case of an auto, it goes the other way; it will never be worth more than your purchase price.
There are several reasons why it might not make sense to borrow 100% and they are worth considering.
The monthly payments on a 100% loan will clearly be much higher than those if you put down 20 – 25%. If you are managing your financial affairs well, living with a budget that monitors your position at any one time, that monthly repayment needs to be entered in your expenditure column? Is it affordable from your point of view?
If you want to get an auto now and have not got a down payment available, then you may decide to take out a loan over a longer period than normal. You can even go up to 7 years but you need to think about the consequences of that. You may be still paying for a significant period beyond the time you want to keep the auto and so you may find yourself paying an auto loan for year after year. Of course, you will be paying much more interest as well.
Your auto drops in value as soon as you drive it away. You are likely to find it loses 20% in value in the first year and if you do take out a 60-month loan rather than any longer, your car will probably have halved in value from new. The ideal situation is that your loan is paid off in full before you would ever consider changing so at least you can have a year or two without an auto loan in your budget. If you still have some value in the car when you do change then at least you can use that value to avoid another 100% bad credit loan.
One thing that you must appreciate is that in the early months of the loan, you will owe more than the value of your auto. This means you will no, or negative equity. What you must avoid is a loan that adds any outstanding money to the purchase price of a new auto. There will be plenty of interest coming out of your checking account.
Refinancing Can Be a Problem
Car dealers are happy with a sale but that does not mean that lenders will not look for you to reduce any outstanding balance on an existing loan certainly to level but sometimes below the value of your existing car. That is effectively the down payment that you were trying to avoid initially and you will have been plenty of interest on the higher figure you borrowed.
If you get into financial difficulties, you may need to sell your auto to get out of trouble. That is not as simple as you might think if you owe a significant amount. You have signed up to a term loan and there is no escape from that. If you have taken a 100% loan then the chances of your finding problems selling your auto in an emergency increase.
There is plenty of temptation in the financial sector, especially if you are considered a reasonable risk. A nice new shiny car on the drive is impressive, but it does not always make financial sense. You should give a great deal of thought about your need for a new auto, especially if you have some financial problems. That may make a 100% loan more attractive but that might just add to your problems. Imagine what benefit it might be if you delay for a while and only need 80% instead of that 100%.
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