Car Loan Financing Essay

1163 WordsOct 6, 20115 Pages
Q1 Taking out a car loan is one way of financing the purchase of a Toyota Corolla. It involves making regular payments on a reducible loan until the end of the terms of contract. The advantages include: • Ability to take full ownership of the car one day and be free of repayments. • The car can be sold at any point in time to recover investment. • No restrictions on mileage, can take as many long trips as desired without penalties. • Level of insurance coverage may be lower than is required by car leasing companies • The loan can also finance road costs, loan insurance, comprehensive vehicle insurance and other additional costs. On the other hand, the disadvantages include: • Repayments are usually higher on a car loan and only the interest and depreciation costs can be tax deductible if car is used for business purposes. • Usually require a higher upfront down payment. • The value of the car is highly depreciative. “Cars depreciate on average by around 14% a year for the first three years” . Hence paying off a loan over a long time period may mean repaying the sale value plus interest when the actual car is worth much less. • Generally has a market fluctuating (variable) interest rate, compared with usually a fixed interest rate on car leases. If the RBA increases interest rate often over the repayment period, then the interest burden can get increasingly heavier. • If the car loan is secured and I default on repayments, especially when interest rates are hiking up, I could potentially lose ownership of the car and any other secured assets. The bank may claim the assets and sell it to recover the loan. This would adversely affect my credit rating as well, which could impact on my ability to obtain future loans. A second finance option is a car lease, where a financier buys the Corolla on my behalf. I would pay regular payments during the lease

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