Buying a Car: Should You Pay Cash or Finance?

Buying a Car: Should You Pay Cash or Finance?

Buying a Car: Should You Pay Cash or Finance?
Reading Time: 4 minutes

Ask anyone who’s bought a car, and most people will tell you that they struggled to decide whether they should pay cash or finance their vehicle. But how did they come to a decision? That’s what we’re here for. In this post, you’ll discover:

  • Three questions to ask yourself on about whether to pay cash or finance your first car
  • The benefits of buying your first car using cash
  • When to finance
  • How to combine cash and financing

Let’s get this show on the road, shall we?

Cash or Finance? Questions to Ask Yourself

Below are some questions to help you decide between financing your first car and paying for it upfront.

What’s my credit rating like?

If you haven’t already, your first course of action is to check your credit report. Having an excellent credit score makes it easier for you to access low-interest financing incentives than someone with poor ratings.

Do I Want A Used Or New Car?

Here, the differentiating factor is affordability based on your preferences. You may have the burning urge to get a new car, but the question is whether you can afford it. If the answer is yes, then go for it! However, if you don’t have sufficient cash on hand to afford your dream car, you can decide to go the financing route.

What’s My Current Financial Status?

If you need a vehicle, whether used or new, and you don’t have a substantial sum in your savings account, financing is likely your best shot. If you have just a few thousand dollars in savings, don’t be tempted to use them to pay for the car up front; instead, keep that money as an emergency fund. Most financial experts suggest that you have enough funds to cover 3–6 months of everyday expenses.

The Benefits Of Buying Your First Car Using Cash

There are many benefits if you save enough cash to pay for your first car upfront instead of financing it. We’re talking about eliminating security risks, diminishing the odds of overpaying, and eliminating the possibility of repossession; or perhaps you don’t just like the idea of being in debt. Let’s explain further.

Eliminate The Odds Of Overpaying

When financing your first car, you’re more likely—no, you’ll certainly—overpay due to the interest cap on the loan. Let’s put this into perspective:

Say you take a 60-month car loan for $25,000 at a 5% interest rate. In this case, you’ll need to pay $472 monthly for the next five years to repay the loan. By the end of the period, you will have paid a total of $28,320, which is $3,320 more than the base price. If you’d rather avoid these extra payments, go for a one-time cash purchase.

No Risk Of Repossession

Nothing is more frustrating than having your car repossessed due to defaulting on a loan payment. It harms your credit score and causes inconvenience, especially if you had relied on the car to make a living. Here’s some good news: buying your car in cash prevents the lenders from coming knocking, and it’s a move worth every penny considering the impact the repossession can have.

Stay Free Of Debt Commitments

Perhaps unsurprisingly, most people have embraced debt as a regular part of their lives, thanks to the harsh economic times. However, if the idea of being in debt doesn’t sit well with you, then you can avoid the stress by purchasing your first car in cash.

When Is Financing Necessary?

The apparent advantage of financing a car rather than paying cash is that you can own your dream vehicle without spending a single penny upfront. But is it a path worth exploring? Here are a few instances when financing can be a good idea:

When There Are More Lucrative Opportunities To Invest Your Cash

It may be easy to confuse financing with simply lacking enough disposable cash to afford a car upfront, but that’s not always the case. Sometimes, it’s wiser to keep your cash in a financial institution and let it continue compounding interest or investing it elsewhere in a more lucrative opportunity, such as the stock market or real estate. In those cases, it may be an excellent idea to finance your car and grow your cash through investing.

When You Want To Spread Out The Cost Of The Car

If your dream car comes at a huge upfront price and you want it now, it may be wiser to finance and thus spread the cost over an extended period. Although the cumulative cost at the end of the loan period may be slightly higher than the cash price, it’s still a convenient solution since you won’t be spending all your disposable earnings and savings.

How to Combine Cash and Financing

While both methods are reasonable means of buying your first car, we can’t be blind to the fact that any vehicle is a depreciating asset. If you choose to finance, your car will lose value as you make payments over the years. That’s a bitter pill to swallow since, by the time you settle the loan, you will have paid more than the car is currently worth. That can leave you in a negative equity position.

The solution lies in combining cash and financing: but how?

When on the market, look for dealers or manufacturers that allow both partial upfront cash payments and financing. You then want to offer as much of a down payment as you can so that you’re left with a smaller amount to finance. That way, you can get to positive equity faster.

Conclusion—Cash Or Finance?

The decision to buy your first car using an upfront cash payment or financing ultimately depends on your situation. If you want to eliminate the chances of overpaying, avoid the risks of repossession, or just don’t like having debt, we recommend purchasing in cash. However, if you want to spread the car’s cost or have more promising investments, you should finance it.

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