The cash vs. finance dilemma.
There are few people who have the ability, and have saved enough money, to buy a car outright with cash in hand. It usually takes time, commitment, or a rather large income, to make it possible to pay cash for a car. This is why financing is made available to those who qualify – and is the most common way of purchasing a car today. With financing, you have the option of paying your car off over time (with an additional charge of “interest” as a fee for borrowing the money), rather then in just one lump sum. But, if you have the ability to choose one or the other, what are the pros and cons of paying cash vs. financing a new car?
The benefits of paying by cash.
Many people believe that, if you are able, you should pay cash for everything… including your vehicles. And many times, it can be a good idea to pay cash for expensive items—including cars. Here are some of the benefits of paying cash when you are considering whether to pay cash or finance a car:
- By paying cash, you will lose no money in interest. Interest is basically a fee that is charged to a car buyer for borrowing someone else’s money (the bank’s money, for example). It can range from zero percent to 25%, or more. This can add on thousands of dollars to your loan, whereas if you pay cash, you would only be paying for the negotiated price of the car.
- You wouldn’t risk spending the money. If you’ve saved up enough for a car, and choose to finance… you may end up spending the money that you saved up, rather than applying it to your loan. By paying cash, that money is out of your hands, and your purchase is completely paid off.
- You wont have monthly payments. Debt puts many people into financial troubles. Oftentimes, we spend more than we can actually afford because we know we can pay our purchases off over time. But, this kind of mentality could cause you to take on too much other debt because you “only have to pay $300 per month” on the car. With this kind of thinking, you may end up taking placing yourself in a tough situation.
- Your dealer may accept an offer significantly lower than sticker price (as long as it is still reasonable). Because the dealer knows that he is about to receive payment in full for a car that he wants to sell (and he is not taking a risk that you could default on your loan), it is possible that he will be willing to lower the car’s cost for you.
- You don’t have to make payments on a depreciating asset. By paying off your car immediately, you will never be underwater on your loan (meaning you owe more on your car loan than the vehicle is worth).
The downfalls of paying by cash.
Believe it or not, it may be okay to choose financing over paying by cash in certain situations, as there some potential downfalls to paying cash.
- A low interest rate could save you money. If you can get approved for an extremely low interest rate, you may want to consider taking on a short-term car loan. Borrowing money at 1.25% interest, for example, could make a lot of sense. Especially if you can make more money investing the cash elsewhere.
- A low interest rate loan could even help you make money. If you pay cash for your car, you won’t have those thousands of dollars in your own bank account – or invested in income generating opportunities – so borrowing may allow you to make money if your investments pan out.
- Making reliable payments could help boost your credit score. If you are trying to establish credit – or trying to improve your overall credit score – taking out a car loan could really help you. Keep in mind that you need to make your payments on time and consistently or you could end up hurting your credit score.
The benefits of financing your car.
Financing a vehicle can have many benefits—especially if you don’t have the cash on hand to write a big check for your car.
- You can build your credit score if you are on time and consistent in making your monthly payments.
- If you create a solid relationship with your lender or dealer by making your payments, this could have benefits for you in the future—like a lower interest rate or an easier time getting approved for future credit needs.
- With a good credit score, you could receive a very low interest rate—and thus pay only a small amount in interest.
- Without the need to write a big check for your car, you can free up money each month for other needs in your life.
The downfall of financing your car.
If you are like most people, and can’t afford to pay for a new car upfront, you’ll need to either take time to save up for one, or finance for the car you want. Financing is a great option for most people, but there are some issues when it comes to the question of, “should I finance a car or pay cash?” If financing is the only option at the moment, here are some potential downfalls of choosing to go the car loan route:
- The worst part of financing could be the interest charges. You could be paying hundreds, even thousands, more on your loan just in interest. If you paid cash, you won’t have any interest charges. This is especially true if you have credit challenges as your interest rate may be very high.
- When financing a car, you are somewhat at the mercy of your lender or dealer because it is their money that you want, after all. This “upper hand” could be reduced somewhat if you provide a down payment.
- Typically, while you are financing your car, your lienholder will require you to carry full-coverage insurance. But if you paid cash, and are the owner of your car, you may have the option to purchase liability-only insurance—depending on your state’s requirements.
- Whether you want to finance or pay cash for a car, we can help you at Car.com. After you fill out our free, no obligation application, we will do our best to connect you to a lender and/or dealer in your area who wants to help you find the car you need, and with financing—if that is the route you’ve chosen. The application process is free, and there’s no obligation on your behalf to work with anyone we connect you with. Hopefully we can help you get the car you need, at the price you want!