What Is Your Car Loan For: Lifestyle or Productivity?
A car loan either works for you or against you, depending on how you use the car. See the risks of lifestyle spending and how to choose a new or used car.
A car loan has only two possible outcomes: it works against you or it works for you. It hurts if the car is bought for negative purposes, and it pays off if the car is bought for positive ones. Here is the explanation.
If you plan a car loan purely for consumption, it will almost certainly hurt. The car goes unused, yet you still pay an installment every month.
It is a different story if the car is put to productive use, because then it will almost certainly pay off. For example, you can rent it out or sign up as an online driver for a ride-hailing service. The income from a side job built around the financed car is more than enough to cover the installment, while your base salary is not touched at all.
So once more, a car loan comes down to two words: “harmful” and “beneficial.” Which one the borrower ends up with depends on how well they “manage” the car they bought on credit.
Then which should you choose, a used car loan or a new car loan?
The choice between a used and a new car loan again depends on the buyer, especially their finances. The down payment, the installment and the interest must all fit your income. If your salary is barely enough, a new car loan is out of the question, since a month's pay would most likely go entirely to the car installment while other needs still have to be met.
The installment tenor, or repayment period, also needs to be considered. The longer the loan period you take, the more money you will pay in total.
A car is a movable asset with some of the steepest depreciation, and a new car most of all. In other words, a new car depreciates much more. As soon as it is driven and becomes a used car, its resale price is far lower than the price you paid.
By comparison, a used car depreciates less. Its price does not drop much, which means that if you sell it later, the price will not be far from what you paid.
After weighing all of this, it comes back to your “pocket.” How strong are your finances if you take a new car loan, with all its risks?
In terms of lifestyle, a used car is certainly less appealing than a new one. But a car is not only about lifestyle, is it? Isn't the main purpose of a car loan to achieve positive and productive things?
