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Car Loans Less Costly When Cars Retain More of Their Value

Richard Barrington
LoanBiz Columnist

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There are many factors for car buyers to consider when comparing the costs of new cars. Besides the price of the car, the interest rate on the car loan and size of the resulting car payments factor heavily in the decision. However, in addition to these variables, car buyers should look into the future a little to decide how much a car is really going to cost. This is because resale value can make a huge difference in the long-term cost of any vehicle.

 

Getting a Car Loan Above Water

When the remaining balance on a car loan is worth more than the resale value of the car, the loan is said to be "under water" or "upside down." This happens because virtually all cars depreciate in value, most of which takes place in the first years after a new car is purchased. The value of a car tends to fall faster than the car payments can reduce the balance at first, so most car loans spend some time under water.

 

The typical new car loses some 65% of its value in the first five years of ownership. That's a lot of depreciation, but the good news is that assuming a car loan of five years or less, it means that most cars do retain some value after the car payments stop. The more value a car retains, the faster the car payments can get the loan above water. In the long run, retained value means that the original purchase price can be partially offset through resale value, or through the added number of years the car can remain in service.

 

So What Are the Top Ten Cars for Retaining Value?

According to the Kelley Blue Book, for model year 2008 they are projected to be as follows:

 

1.      Chevrolet Corvette

2.      Honda Civic

3.      Infiniti G37

4.      Mini Cooper

5.      Scion tC

6.      Scion xB

7.      Toyota Corolla

8.      Volkswagen Eos

9.      Volkswagen Jetta

10.  Volkswagen Rabbit

 

The above cars run the gamut from bargain-priced to high-end, but what they have in common is that their ability to retain value should significantly offset the original purchase price.

 

Car Loan vs. Car Lease

This issue of retained value can not only influence what car a person buys, but also the decision of whether to use a car loan or a car lease. The more value a car retains, the better it is to obtain that value by purchasing it outright, while a car lease may make more sense for a car which is not expected to retain much value beyond its initial years.

 

Source:

Kelley Blue Book


About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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