| boat loan, auto loan | 19 Sep 2008 12:00 AM |
| Looking for a boat loan or an auto loan? Check the market before committing to finance by Vicky Edema | |
When you are in the market to purchase a new car or boat, you are generally pretty excited about the prospect, and often to speed up the process will take up the auto loan or boat loan offered by the dealer with whom you are negotiating. As a general rule this will not be the best available auto loan or boat loan and you will invariably save yourself a lot of money if you take a little extra time to search out the best auto loan or boat loan in the market.
There are a number of factors that determine whether your auto loan or boat loan is competitively priced and suits your needs. Quite often the dealer looking to sell you the new car will try to make the auto loan look as attractive as possible from a cash flow perspective. This can be achieved by simply increasing the residual value of the new car or boat – the residual value is the amount that you will still need to repay to the dealer when the auto loan or boat loan expires i.e. at the end of the auto loan or boat loan term (usually 3 or 5 years but can be tailored to your requirements.) if your new car or new boat is costing you say $40,000 then the monthly repayments you will need to make under your auto loan or boat loan where the residual value is say $20000 will be considerably less than if you have a residual value of $15,000. With the lower residual value you are obviously repaying more each month under your auto or boat loan.
While this means that your surplus cash flow will be less it does ensure that when you come to sell the new car or boat that you are likely to be in a position to either pay out the residual value or even possibly make a profit on the sale. This is a much better position to find yourself in that one where your residual has been higher, your monthly repayments under your auto loan or boat loan have been lower but at the end of the day when you come to sell the car or boat, you find that the sale price is not sufficient to pay out the auto loan or boat loan in full. Rather than having some extra cash in your pocket you are in fact, having to find extra money to meet the residual figure.
No doubt there has been a short term benefit with the lower monthly repayments under the auto or boat loan but many buyers find themselves in difficulty at the end of the auto loan or boat loan term because they have not anticipated or made provision for a sale price lower than the residual value. While there is no doubt that money is tight for many households and individuals because of the current high interest rate environment, if you can manage a higher monthly repayment under an auto loan or boat loan then do your best to structure the auto loan or boat loan on the basis of a low residual figure. You will benefit in the long run!
There are a number of factors that determine whether your auto loan or boat loan is competitively priced and suits your needs. Quite often the dealer looking to sell you the new car will try to make the auto loan look as attractive as possible from a cash flow perspective. This can be achieved by simply increasing the residual value of the new car or boat – the residual value is the amount that you will still need to repay to the dealer when the auto loan or boat loan expires i.e. at the end of the auto loan or boat loan term (usually 3 or 5 years but can be tailored to your requirements.) if your new car or new boat is costing you say $40,000 then the monthly repayments you will need to make under your auto loan or boat loan where the residual value is say $20000 will be considerably less than if you have a residual value of $15,000. With the lower residual value you are obviously repaying more each month under your auto or boat loan.
While this means that your surplus cash flow will be less it does ensure that when you come to sell the new car or boat that you are likely to be in a position to either pay out the residual value or even possibly make a profit on the sale. This is a much better position to find yourself in that one where your residual has been higher, your monthly repayments under your auto loan or boat loan have been lower but at the end of the day when you come to sell the car or boat, you find that the sale price is not sufficient to pay out the auto loan or boat loan in full. Rather than having some extra cash in your pocket you are in fact, having to find extra money to meet the residual figure.
No doubt there has been a short term benefit with the lower monthly repayments under the auto or boat loan but many buyers find themselves in difficulty at the end of the auto loan or boat loan term because they have not anticipated or made provision for a sale price lower than the residual value. While there is no doubt that money is tight for many households and individuals because of the current high interest rate environment, if you can manage a higher monthly repayment under an auto loan or boat loan then do your best to structure the auto loan or boat loan on the basis of a low residual figure. You will benefit in the long run!
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