There are so many reasons to need a car – and many more reasons to want a car. Oh the love affair we have with our vehicles. But deciding how to pay for a new car can sometimes be as difficult as choosing the paint color.
Pay in cash or finance? There are pros and cons to both options. Ultimately, the best course of action will be determined by your overall financial health and goals.
Imagine a life without a monthly car payment – sounds great right? That money could be used for savings, paying down debt or investing for retirement. And that’s not the only reason to pony-up cash at the dealership. Cash buyers usually pay less than those who finance. Even if the dealership is offering 0% APR, there are often rebates for cash customers, not to mention having cash-in-hand puts you in a stronger bargaining position. Owning your vehicle from day one also gives you the ability to decide when and if you want to sell your car
Paying cash will seem a lot less fun when you realize what your budget allows. Even for luxury vehicles the financing terms may seem affordable, but when you need to scrimp and budget your way to a lump-sum payment for a vehicle, your dream car might be out of reach. Another con of paying in cash is handing-over that hard earned savings. Maybe you had to deliver newspapers or swear off Starbucks to save your car money and now that you bought your car, you no longer have that financial cushion you worked so hard to build. But, remember, without a monthly car payment you should be able to rebuild a sizeable savings account (even if you do return to your latte habit).
Banks, Credit Unions, car dealerships – they all want to pay for your car, so let them. When you finance a vehicle, the lender technically “owns” the car and they will want to protect their asset. That means warranty programs that may not be available if you pay in cash. Financing is also particularly smart for people, like students, who need to build credit history. Part of your credit score is determined by the types of credit you have (mortgage, credit cards, student loans, etc.) and a car loan is one type of credit. Also, if your credit score is good (in the 700s) you will likely get offered one of the best interest rates.
It may seem counter-intuitive, but if you have a really great credit score and you have enough savings to pay cash (without depleting your emergency fund), you should finance. If you take the cash to pay for your car and put in a high-interest savings account, finance your car for 0%APR and have the car payments set-up to automatically come out of that savings account – you will actually make a little money from the interest earned. You get the benefits of not “paying” for your car every month, plus the warranty benefits of financing.
Of course, there are cons to financing. As mentioned before, the monthly payment can really drain your budget and eat-up your free cash. Also, cars always lose value. When your financing terms are over and you decide to sell, you will sell the car for much less than you paid for it. If your credit score is suffering, that vehicle purchase can get really expensive, really quick. No matter what your credit score, there are many lenders who are willing to offer car loans – but, at very high interest rates. That monthly car payment will hurt a lot more if it’s the size of your mortgage payment.
Consider your entire financial picture when you decide how to purchase your next vehicle. Do you have a good enough credit score to secure reasonable financing? Will a used car fit your needs until your debt is under control? Your car needs to be able to get you where you need to go in life, but it shouldn’t detour your financial goals on the way there. If your credit is on a detour then call Ovation Credit for a Free Consultation and see what you can do to bring your credit report and score back on track.