Car loans: are they worth it?

New car finance sounds like a deceptively simple field, clearly referring to the taking out of a personal loan in order to fund the purchase of a motor vehicle. In reality, however, there are a number of nuances relating to this type of finance that set it aside from other types of loans.

The first thing would-be borrowers need to be aware of - and something that people consistently neglect to take into account - is the fact that cars depreciate in value over time. That puts vehicle loans in sharp contrast to home loans, for example, with UK property prices having risen a massive 200 per cent over the past decade.

Factor in interest repayments - which will invariably raise the amount you pay back by hundreds of pounds above the as-new value of the vehicle - and taking out a loan for a vehicle suddenly becomes far from an appealing prospect.

Having said that, motor vehicles can be an essential investment for many individuals and small businesses and there are undoubtedly a number legitimate reasons to take out a loan for a car.

The most immediate benefits of car loans is that they allow people who could not otherwise afford to own a motor vehicle to drive away with one immediately, and furthermore to become the legal owners of that vehicle from day one. They are therefore ideal for people who envisage being able to pay off loans in the relatively short-time, functioning primarily as a kind of bridging loan.

Furthermore, because the industry is awash with a vast array of lenders, there are relatively few restrictions on the types of vehicles that loans are available for, even during times of economic uncertainty when lenders might otherwise be expected to rein in loan approvals.

There are also a wide range of personalised benefits that are intended to make car loans more attractive, all of which vary from lender to lender. These predictably revolve around services that drivers will inevitably need to take advantage of, with discounts on such things as vehicle inspections, car parts and breakdown cover being the most popular bonuses.

In addition to all the benefits, however, there are also a number of distinct disadvantages facing people who choose to borrow for a car.

The aforementioned depreciation of motor vehicle values is one of the key deterrents cited by financial advisers, while other potential pitfalls tend to revolve around more familiar downsides to borrowing. These include variations to advertised APRs, the need to have a decent credit rating and the risk of losing your home or other assets if you fail to keep up repayments on a secured loan.

At the end of the day though, for anyone who finds themselves in desperate need of a lump sum with which to buy a vehicle, car loans will always offer an attractive, quick-fix solution.