8 Jan

Car Loan or Cash Payment?

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So you’ve decided to buy a car, but torn between paying cash and getting a loan. Most people would argue getting a car loan while you can afford to pay cash doesn’t make any sense. But the truth of the matter is it makes perfect sense. Paying cash for a car isn’t always the smartest move. There are lots of factors to consider first, but it’s up to you to decide which ones are the most important.

Let’s weigh these two options first.

Paying Cash

According to most people, this is the way to go and there’s no two ways about it. It’s true to some extent cause if you can afford to buy a car with cash, why not? Life is better when you don’t have debts anyways. Furthermore, you don’t have to worry about monthly payments, interests and more importantly, you’ll own the car.

A car depreciates the minute you drive it off the lot. In fact, it loses around 15-20% of its value each year. So, paying cash ensures you don’t end up with an upside-down car loan, in which the amount you owe your finance lender is higher than your car’s value. Also, you can trade in or sell the car anytime you feel like.

On the other hand, paying cash doesn’t help you build a better credit score. Further, you are likely to miss out on an opportunity to make more money by not investing the cash you pay for the car. It also means you won’t have that money in case you need to use it for other purposes.

The bottom line is, pay cash if you can afford the car without emptying your emergency fund.

Getting a loan

Sometimes getting a car loan makes more sense than you think. For example, if you have a strong credit score, it boosts your chances of getting a lower interest rate on the car. So, in this scenario financing sounds more logical. Of course the total car cost would be a bit higher, but you’ll be able to keep your cash working by investing. It won’t hurt to lose a small amount of money while generating enough returns right?

Financing a car also gives you an opportunity to improve your credit score only if you make timely payments. Further, money will be at your disposal in case you need it for an emergency or something else. If you put your money on the line by paying cash, it means you won’t have a safety net in case a financial crisis strikes. And this is just a poor financial purchase.

Financing also means you are not the car’s legal owner until the loan is settled. Having a depreciating asset that’s technically not yours is definitely not a good feeling.

If you are still finding it hard to make a solid decision, ask yourself the following questions:

  1. Are you looking to buy a new or used car?
  2. How much is in your savings?
  3. Do you have an emergency fund?
  4. Are you a smart investor? Do you have the ability to earn more money?
  5. How is your credit score?
  6. How well do you manage your finances?
  7. What interest rate can you qualify for?
  8. Do you have debts? If yes, is it manageable?

Answers to these questions will give you most of what you need to make the right car-buying decision.