Straight Talk About Car Loans

Recently I had a meeting with a banker about an unrelated matter – until she mentioned car loans.

For car loans she suggested going to a credit union rather than borrowing from a commercial bank. When I expressed surprise because, after all I was in a commercial bank, she simply said, “If I tell you 9% is better than 5% you wouldn’t take me seriously.” She was right.

She also went on to say that used car loans are not worth it. The interest rate is even higher since banks usually lend up to 100% LTV (loan to value). But cars depreciate, which means the longer the loan goes on the greater the risk for the bank.

The car used as collateral on the loan is certain to be worth less than the amount of the loan, while the loan balance decreases much more slowly on a term loan. So the bank has to charge higher interest rates to cover their risk.

Of course, I don’t have a car payment to begin with, and you can eliminate yours too by paying cash to buy cars. Good used cars make it easier to do so.

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