Save Money On Car Loans - Part 2

If you want to save on car loans there are certain techniques that will allow you to save thousands over the life of your next vehicle. Here's the second part of this valuable course.

The Fund The Depreciation Trick

I must warn you that this technique is only for people who have an advanced understanding of money and finance.

If you can't afford to buy your next car, and don't want to pay the high rate of interest on most personal loans or car finance agreements, here's what to do;

a) Choose a car that depreciates as slowly as possible

You can find this information in many car magazines or on the internet. Alternatively, you can work out your own figures using the prices charged for second hand models in your area.

So let's say you decide to buy a new car that will be worth 66% of its value after three years (assuming it stays in good condition and covers an average amount of miles). That's great.

It costs $30000. So you could get a personal loan at perhaps 8%, which might cost you $1100 per month over three years. But that seems rather steep, so you move on to the next stage of this idea.

b) Take a personal loan to cover the cost of the depreciation over the period you plan to keep the car

The car costs $30000 and will be worth $20000 when you sell it three years later. The depreciation will cost you $10000 over three years.

So you take a personal loan for $10000 over three years at a cost of $367 per month and move on to stage three.

c) Fund the rest of the cost by extending your mortgage on an interest only basis

The car costs $30000, you have $10000 from your personal loan, which leaves $20000 to find.

As a mortgage is secured borrowing (less risk for the lender) the interest rate is much lower. Assuming a low mortgage rate, another $20000 might cost $130 in interest per month.

Overall, it will cost you $497 per month to fund your car using this method.

Now you'll notice that mentioned an interest only mortgage. This was to keep the cost of the loan down. All you need to do is to keep the debt from getting any bigger until you sell the car.

Three years later when you sell the car for $20000, you can use that to reduce your mortgage and get back to the position you were before you got the car.

So instead of it costing you $1100 a month (or an average of $544 a month when the sale price of the car is taken into account $1100 x 36 = $39600 - $20000 = $19600/36 = $544) throught the personal loan route, it will only have cost $497 each month. Saving an average of $47 per month (or $1692 over the three year period), and making it much easier to meet your monthly repayments.

In effect, what it does, is to save money by temporarily shifting the bulk of the price (the retained value) over to a long term loan (your mortgage) at a lower rate of interest, until you can repay it by freeing up the value of the asset (selling the car).

At the same time, the short term loss (the depreciation over 3 years) is repaid over the short term (three years) using the personal loan.

As I said, this is an advanced technique, but it will save you money on your next car. But let me say four things;

One: Only use it if you don't have the money to buy your next car and don't want to pay the high interest rates of a personal loan/car finance agreement.

Two: It will only work if the value of your property is enough to allow you to increase your mortgage.

Three: It also increases the risk that you won't be able to pay your mortgage and your home will be repossessed.

Four: And there's the risk that your could lose money if your car is written off and you don't receive adequate compensation (but the same could happen if you borrow money to buy a car, regardless of how you borrow it).

Next: Save Money On Car Loans - Part 3

Previous: Save Money On Car Loans - Part 1

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