Should I Take Advantage of an Interest Free Car Loan?

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Many car companies are offering five-year loans with interest-free loans to encourage consumers to purchase new cars. But is purchasing a new car with an interest-free loan a better choice than purchasing a used car with a loan with interest? Many people may think that the better option is the interest-free one since you do not have to pay interest to purchase the car. However, this does not take into account other factors like the depreciation of the value of the car.

How Much Will You Lose When You Purchase a New Car?

However, it is important to realize that a car is a depreciating asset. Many people consider cars an investment because of the large purchase price, but a true investment should bring you a rate of return for the money you spend, and a car will not. Generally-speaking, a car will lose anywhere from $1600.00 to $2500.00 dollars in the first year of ownership. Most cars will depreciate from between $6500.00 to $10,000.00 over the first five years of the life of the car. If you are thinking about building your net worth or reducing your debt, it does not make sense to spend a lot on a depreciating asset. 

How Much Will I Pay in Interest for a Used Car?

If you realize that the car is going to depreciate in value over time, the next question is to look at how much interest you will be charged over the life of your loan to see if you will come out ahead by buying a used car at a lower purchase price.

With the purchase price of $12,000.00 and an interest rate of six percent you will end up paying interest of about $1160.00 over the life of a three-year loan. You may be able to find an even better interest rate by shopping for a loan

It is also important to realize that the value of a car depreciates much more rapidly the first three years of the life of the car and begins to slow down by the time it is five years old.

So although the car will continue to depreciate in value it will do so at a much lower rate. If you are looking for the best value, you really should consider a used car that is about five years old. Be sure to do your research to make sure that you buy a car with a good consumer report and that has a good history with few required repairs. 

Looking at the average numbers buying a three year old or a five year old car will save you money in the comparison of interest paid out ($1160.00 for a three-year loan) to the average cost of depreciation of the first year ($1600.00-$2500.00), which doesn’t take into account the further cost of depreciation over the next two or three years. If you are just looking for the option in which you will lose the lowest amount of money, then your decision should be fairly easy to make. 

Is it Better to Buy a Used Car with a Loan or a New Car With an Interest-Free Loan?

Although buying a new car with an interest-free loan may seem like a good idea on the surface, you will still lose more money than if you were to buy a used car with a loan that has interest. The loss will be even more if you roll your old car loan into a new one. If you can purchase your car with cash you will end up losing even more money in comparison with buying a new car.

Additionally, many used cars come with warranties and are still very reliable.

It can be tempting to buy a new car, especially if it is your first car or if you had a lot of repairs for your old car. Just remember over time, it is still less expensive to buy a used car rather than a new car,even with the cost of car repairs. You may want to set up a​ sinking fund to cover car repairs. You can also begin saving so that you can purchase your next car with cash instead of worrying about finding a loan.