If you’ve got your eye on a high-end or exotic car, the chances are that you’re trying to figure out how to finance it. The good news is that you don’t have to be stuck with a conventional auto loan that requires you to pay off the car within just a few years. Instead, you may qualify for a 144-month auto loan through a specialized auto lender. Whether or not that’s the best decision for your new purchase, however, is another issue.
To help you ensure that you make the best decision when it comes to financing your new vehicle, here are three benefits and drawbacks to consider.
Pros of taking out a 144-month auto loan
If you’re not sure whether or not to get a 144-month auto loan, here are three main benefits to consider.
Some high-end and exotic cars appreciate over time. If the one you want to buy belongs to this subset, it may not make sense to put all your eggs in one basket by paying cash.
For example, let’s say you pay $1 million in cash for a car and sell it for $2 million five years later. You doubled your investment.
In contrast, let’s say you put down $200,000 on the car and get a 144-month loan with an 8% interest rate and a monthly payment of $8,660. Over those five years, you’ll have made $519,600 in monthly payments for a total investment of $719,600.
As a result, you made back 2.8 times your investment when you sold the car.
2) Opportunity cost
Parting with a big chunk of money at once means you can’t use that money for something else. If you have other big financial goals that you’re saving for, it may make sense to hold onto your cash and spread it out amongst your other financial goals.
“I took out a loan on my Ferrari because I was also eyeing a real estate investment at the same time,” says Bill Shepard, an exotic car enthusiast from New York. “It didn’t make sense to pass on the real estate deal, so I did both.”
3) You can’t afford it now
If you’ve wanted to own a high-end or exotic car, you may not want to wait until you have the cash to pay in full so you can scratch that emotional itch. This is no different than someone getting a conventional auto loan for a family car that he or she can’t afford up front.
3 main cons of taking out a 144-month auto loan
Despite the benefits of getting a 144-month auto loan, there are three major problems to consider.
1) It’s not available for just any car
Lenders typically require that the price of the car exceed a certain value to qualify for a loan with this long of a repayment period. Even if your car does meet the price requirement, some specialized lenders won’t finance certain cars, especially if they’re high-production models.
2) High interest rates
With a conventional auto loan, you can typically get an interest rate below 3%, if you qualify — even as low as 0% in some situations. 144-month auto loans, however, charge much higher minimum interest rates.
There are two reasons for this: First, the longer repayment period is riskier for any lender because there’s more time for uncertainty. Second, even with a 144-month repayment plan, your monthly payment will be large, and you could end up defaulting.
3) High depreciation potential
High-end and exotic cars aren’t just modes of transportation — they’re also commodities. Depending on the future supply and demand of the car you plan to buy, the car could depreciate instead of appreciating. And it can depreciate much faster than you originally anticipated. If this happens, you could end up underwater on the loan before you know it.
Should you use a 144-month auto loan to buy your car?
There’s no right or wrong answer to this question. “It really depends on your financial situation and other goals,” says Shepard.
Take some time to research your options, and consider both the pros and cons of using this kind of loan to finance your new car. Considering how big of an investment it is, it’s worth taking your time to make sure you’re making the right decision. This auto loan offer engine can help you see what you qualify for without hurting your credit.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.