How Auto Loans Compare to Other Types of Debts
2016 saw a record number of auto sales in America beating all previous years. The record sales were accompanied by a substantial rise in auto loans. The outstanding auto loan debt in 2016 was $1.2 trillion, a 9% rise from 2015 and a 13% rise from the 2005 pre-crisis figures after considering inflation. On the other hand, the number of cars and trucks purchased rose by just 1.5% from the previous year and 9% from 2005.
It is clear that the demand for auto loans is on the rise but how does it fare compared to other types of debts. Let’s find out.
1. Auto Loan: An average auto loan takes about five years to repay and some can even take as long as six to seven years. During this period, it is possible that the value of the car falls below the amount you pay for it. Plus, you have to pay for repairs and maintenance costs. That’s why auto is considered as a bad debt. The good part, however, is that the terms are likely to be unchanged, which helps you plan the repayment better. Refinancing the loan is an option for repayment.
2. Student Loan: A student loan is considered as a good debt as it is likely to improve your financial position. Some student loans are also tax deductible. The risk factor is whether the student will complete the studies and secure a good job to enable repayment of the loan. Unlike other debts, there aren’t many ways out of this debt other than bankruptcy. But, if you manage to pay the installments on time, you should not be too concerned about repayment.
3. Mortgage Loan: Just like a student loan, a mortgage loan for buying a home is considered a good debt. This is because the home is an asset that improves your financial position. You could also avail tax deductions if applicable to you. On the flipside, many homes have negative or near negative equity, which means homeowners owe more on a house than the actual valuation. You can build the equity by doing a reverse mortgage or selling the house.
4. Credit Card Debt: Credit card interest rates are the highest when compared to other types of debts, going up to 15-20%. It might seem like a small expense on unsubstantial credit card bills until they pile up without you even realizing it. There are also a lot of benefits of using credit cards. You could benefit from offers and cashback deals while shopping which can actually offset the interest. In the case that you are unable to pay back the credit card dues, the impact is not as bad as compared to other debts.
Irrespective of the type of debt, timely repayments can improve your credit score. It is advisable to compare the interest rates, payment terms of the different debts and alternative options available before you decide what loan you need to finance your requirements. Most importantly, consider your ability to repay. That’s how an auto loan scores over a mortgage loan.