Auto Loans: Consider Alternatives on 02/21/2011

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If you read articles about ‘how to go green’ or ‘how to save money,’ you know that giving up your car is always one of the top suggestions. Yes, getting rid of your car will reduce greenhouse gases and open up a lot of room in your household budget. But the truth is, even if you wanted to, giving up your car may be impossible. For large swaths of America, going carless simply isn’t an option. Public transportation is great, but for millions of Americans, it’s completely unavailable.

If you need a car, your pocket book is going to take a big hit. Whether buying new or used, few people can afford to drop thousands of dollars at once to purchase a vehicle outright. Most people turn to financing to obtain their wheels. But before you take out your auto loan, ask yourself if it makes sense.

Auto loans aren’t investments; they are necessities. Unlike a house, which traditionally can be assumed to grow in value over time, a car is a poor financial investment; a car may be an investment in your mobility, but it will never gain value. In fact, the value of most vehicles sinks like a stone as soon as they are driven off the lot. Depending too heavily on financing can lead to you paying far more money in the long run than your car is actually worth.

Before purchasing your next vehicle, consider the alternatives that might be available. Going without a car would, of course, be the most economical decision, but it’s probably not practical. But paying thousands of dollars in interest over and above the actual cost of the vehicle isn’t very practical either.
One place to look in this instance is friend and family lending. If you have a friend or family member who is willing and able to make a loan, this can be the perfect solution to the unreasonable interest rates common in many auto loans.

If you consider friend or family lending as part of your auto financing package, be sure to set up a proper, legally binding loan agreement that lays out all the terms of the loan. Just as with a traditional auto loan, agree on an interest rate and set up a payment schedule. Make payments on time and pay the loan down quickly to reduce the amount of interest you pay overall. For more information on friend and family lending, the benefits, the risks, and how to do it right.