Bank loan to buy a car

Fredhb92

Hi,

I am thinking of buying a used car and rather than use PCP I am debating whether to get a bank loan. As the interest rate is low I am thinking this is a good idea however I have a question. Is it possible and what are the negatives with taking out the loan for a longer period to reduce the monthly costs and paying it back early (I.e. 3 years of the 5)? I know I'll pay slightly more in interest but I don't think it will be much plus I'll own the car. I would sell it after say 3 three years and use the longer term to pay less each month and then pay the loan off. I'd just like to know if it is possible and the implications.

Thanks

PeacefulWaters

It's a few years since I was close to credit scoring systems as a bank manager.

But a five year term for a car loan was often declined when a four year term (with higher payment) would be approved for the same applicant.

MallyGirl

Fredhb92 wrote: »

Is it possible and what are the negatives with taking out the loan for a longer period to reduce the monthly costs and paying it back early (I.e. 3 years of the 5)? I know I'll pay slightly more in interest but I don't think it will be much plus I'll own the car. I would sell it after say 3 three years and use the longer term to pay less each month and then pay the loan off. I'd just like to know if it is possible and the implications.

Thanks

The problem with a term longer than you intend to keep the car is that, at 3 years you sell the car and have 2 years loan left to run but actually you will want to buy another car. If you get finance on this too then you have 2 loans running at the same time. Or you use the sale of the first car to pay off the loan early but then that fact won't be reflected in your credit history for several weeks and in the meantime you have to borrow more for the replacement car as you couldn't use the old one as trade-in/deposit. Messy

leespot

You should only take the loan for as long as you intend to keep the car.

Herzlos

You might get hit by an early settlement fee if you pay it off early, but it's usually based on 60 days interest so you can get away with almost paying it off and letting it finish early.

You also run the risk of negative equity; the car will depreciate at the same rate, but if you pay the loan back more slowly, you risk being in a position where the car is worth less than the loan, which may give you issues when you come to replace it.

That said, if you're planning (and actually manage) to make regular overpayments, it shouldn't cost you much more to go for 5 years instead of 3.