A car purchase is one of the most common reasons why a consumer chooses to take out a car loan without equity. If you are one of those who are considering taking out a car loan to finance a new car then it is important that you have a good understanding of how a car loan without equity works.
What is a car loan without equity?
A car loan without equity is, as the name implies, a loan intended for financing a car where you do not need to add equity. You decide how much you need to borrow and the repayment period. Most car loans without equity will have a repayment period of 3-5 years, but this varies. There are also car loans with no equity and without collateral for those struggling to provide collateral for the car loan. You must pay a higher interest rate if you apply for a car loan without collateral as the bank has no collateral. Normally, the size of the loan will have an impact on the effective interest rate you pay for the loan. The more you borrow, the lower the interest rate. That said, make sure you don’t borrow more than what you can pay back.
Are there any pros and cons of a car loan?
One of the benefits you have with a car loan is that the effective interest rate you pay for the loan will normally be lower than what you would otherwise have paid for a consumer loan. This is natural as the bank takes security in the car you buy. The effective interest rate you pay for a car loan is usually between 5-8%. One of the biggest disadvantages of a car loan is that the car you buy will lose value over time. In fact, it is not unusual for the value to decline by as much as 1/3 of the car’s value over a period of 3-5 years. Some cars such as sports cars will lose much of their value over a relatively short period of time. It is therefore important that you think carefully before choosing a new car. In addition to the car price, you also have to pay annual fees and insurance, it gets expensive quickly! Keep in mind that long-term car loans will cost you more than a short-term car loan as you will have to pay more interest and fees.
Things to consider before applying for a car loan
When you apply for a car loan without equity, the bank will make a credit assessment of you. The better credit rating you have, the better the deal! It is therefore a good idea to check your credit rating with a credit reporting agency such as Boliditet or Exporian