Should I Finance a Car or Pay Cash?
Why Should I Finance a Car?
Financing a reliable car comes with loads of benefits. Overall, it's an ideal option for any driver who has been thinking about buying a reliable vehicle, but may not want to buy it in full. That's because financing allows you to pay for the car in monthly payments over the course of about two to seven years, depending on your loan terms. You can also put a bit of money down to reduce the cost of monthly payments.
The pros of choosing to finance a car may include:
- Improving your credit
- More vehicle options
- Monthly payments that are easy to work into your budget
- Greater investment opportunity
Auto financing is an excellent way for car-buying college students and those with low or no credit scores to build and improve their credit. Being approved for a loan and making payments in full and on time each month will help establish and enhance your credit history over time. That way, you're more likely to be approved for even better rates and terms in the future.
Buyers who have a good credit score will find it extremely beneficial to finance their next car. Why? It's an excellent investment opportunity. You can hang on to a potentially large sum of money while paying a little bit toward your loan each month. When it's time to sell, you may be able to get a great return.
While there are tons of great perks to financing, there is a drawback that all drivers should consider: interest rates. The interest rate is a percentage of the loan amount borrowed that's added to your monthly payments. Overall, it can raise the total amount you end up paying when financing.
Why Should I Pay Cash for a Car?
Paying for a car in cash is one of the best ways to help a driver save a bit of money on their purchase, as there are no interest rates like there would be if you finance. For example, if you take out an auto loan for a used car that's $15,000 and your interest rate is around 5% over the next five years, you could end up spending close to $2,000 extra on your vehicle. Pay cash, and you'll only be paying the $15,000 and whatever fees are included.
There are several situations where paying cash for a car is the way to go. You may be able to enjoy benefits like:
- Current expenses won't be disrupted by a monthly payment
- No interest
- No credit check
- Reduces the likelihood of overspending on a car
You won't need to deal with interest when you decide to pay with cash. That's because you won't need to take out any auto loans. If you wanted to buy an affordable used car in full, all you'll need to consider is the price, as well as taxes and additional fees. You also won't need to deal with any monthly payments.
If you'd rather skip the credit process, paying cash is the way to go. There are no credit checks, so it doesn't matter what your current situation is. That also means there's no need to sift through an endless list of offers from banks and lenders.
It's exciting when you find your dream car. It's so exciting that it can be easy to forget exactly how much you had planned to spend on your next set of wheels. That's virtually impossible to do when you choose to pay all cash. You'll already have the amount set aside, so you won't fall for an option outside your budget.
What Are the Cons of Paying Cash?
Just like with financing, there are also cons to paying all cash for your next car. The most common tend to be:
- No opportunity to build credit
- Purchase could deplete emergency money
- Little to no discounts
One of the most important drawbacks to keep in mind is that buying in cash can deplete a bit of your savings, depending on the price of the car. To avoid this, you'll want to make sure you've budgeted properly before heading to the dealership. That way, you'll be ready for any unexpected expenses that come your way.
Having the chance to skip the financial process when buying a car is a huge benefit to many drivers, but the one con to doing so is that you won't have the opportunity to build credit. That could hurt those trying to build a reliable record for the future. If you already have a great score, you're in the clear.
You may also miss out on any additional discounts or financing specials offered by the dealership for financing. Depending on your current situation, you could qualify for incentives when you finance that could help further boost the value of your used car in the long run. Dealers will only apply specials to all-cash buyers in rare cases.