Should You Pay Cash or Finance Your Next Vehicle?
If you have been reading other personal finance blogs recently or if ever, then you might have seen a few articles about buying a car. Heck, even I had a guest post yesterday about paying off your debt before buying a car. There are so many words of advice about purchasing a car that I wanted to throw my hat in the ring as well. The reason I want to do this is because I have a little different view point about purchasing a car. I don’t disagree with the other view points as I think they are valid, but I just have a little twist in how I see it. As stated time and time again, finance decisions like this are personal and you have to make the best financial decision based on you.
Pay Cash or Finance Your Car?
There are only two ways to buy a car, whether it is new or used. You can pay cash for it or you can finance it. There are many ways to finance a car, whether it be dealer financing, bank financing, or personal loans. No matter what way you split it, you still have to pay for the car. I don’t want to discuss different ways to finance your car, but I do want to discuss when you should think about paying cash or finance your next car. Let’s break it down, shall we?
Buying Your Car with Cash
Typically, you should always think about paying cash for your car. You can either pay the full amount with cash, or you can do a slit between cash and financing. The more cash you put down, the less you have to finance. The less you finance, the less you will pay in interest. It is just simple math. Cash will get you a car with no strings attached and you will not have to make monthly payments.
Most people pay cash for used cars because they are cheaper. This means you don’t have to save up as much, so you can get into a car quicker. Paying cash for a new car would be very difficult for most people. I don’t know that many people that have $20,000 in cash just sitting around.
Having said this, I do think there are times when cash might not be king. You might wonder where I plan on going with this and why a personal finance blogger might be advocating not using cash. Let me explain below.
When to Finance Your Car
If you are in debt, then I DON”T recommend financing a car. You are just adding more debt and you need to get your other debt paid off. You can find yourself very underwater if you keep adding debt on top of debt. Now, if you don’t have any debt (minus your mortgage), then there are times when financing might actually be a good idea. Have you seen the financing offers out there these days?
When I am watching TV on my over-the-air antenna, there are so many commercials right now for new cars. The reason for this is that dealers need to get their old inventory off the lot. When this happens, they are more willing to give you deals. What type of deals you ask, how about extra low interest rates.
0% APR for 60 months
0.9% APR for 60 months
Have you seen these offers on TV lately? Look at those deals. Now, these are only for new cars and you have to finance the car through the dealer, but why would you not finance a car at 0%? Remember that these deals are only good for those who have good credit. If you have bad credit, don’t finance a car. Save up for one and buy it with cash. You will always lose when you finance a car with bad credit.
Let’s say you have the cash to pay for a car, but you then get offered 0% to finance the car through the dealer. If it was me, I would go with the financing. Why, you ask? The dealer is giving me free money to finance through them. I can get into a brand new car and not pay a dime in interest for it. Yes, I have to pay a monthly payment each month, but now I have my cash to do whatever I want with.
I would take the cash for the car and then invest it. The average return on the stock market is around 8%. Would you rather pay cash for a car or be able to finance it with no interest and then have your money make money? I choose to make money.
There is another reason why I would choose to finance and that is when you need to keep your cash liquid. Not everyone can drop a lot of their cash on a car because it would leave them with nothing. No back up funds, no emergency funds, nothing. That is not a safe place to be in.
I have been offered used car loans from my credit union at only 1.49% APR. I would even take that financing offer over paying cash for the car. This is a very personal decision for me, but I would rather have the cash liquid or making money with investments. Do you think it is risky to invest the cash instead of paying for the car? I think it is, but you can gain anything if you don’t risk anything. Just remember that.
What Should You Do?
This is the question you probably want me to answer for you. Unfortunately, I can’t really do that because I don’t know your situation and how you are with money. What I can tell you is that you should think about the possibility of paying cash or financing. I would typically suggest paying cash for your next car, but in today’s economic environment, I would suggest financing for those with good credit. Lenders are giving out money at extremely low interest rates and that probably won’t last. If you can get a new car at 0% or a used car at less than 2%, then I think it can be a smart move. Yes, you are adding debt, but you are paying very little for it.
There are many other things that I can do with my cash instead of tying it up in purchasing a car outright. I like when my money is making me money. That has always been a dream of mine. If I pay cash for a car, then I don’t have access to that cash. If I finance at an extremely low rate, then I still have access to my cash and I can do what I want with it. I like when I have options.
Make sure you look over what you can do. Don’t just finance the car because you can. Do the math between paying cash and financing and then make your decision. I wanted to write this to show that it is not always cut and dry when purchasing a car. If you don’t ever want to add debt, then don’t finance a car and pay for it with cash. If you don’t want to put all of your available cash toward a car purchase and can get a great, low rate, then finance your car. There are options out there for everyone.
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