Once you decide to buy a car, several other decisions are bound to follow.
Do you purchase from an Asian, European, or American brand? What model? What year? What color? Should you go for a brand-new car or will a secondhand one do just fine? Most importantly, what accessory will you hang from your rearview mirror??? (Okay, I was just kidding on that last one.)
When it comes to paying for your car, however, it all comes down to just two options: paying for the automobile in full with cash or going with a financing plan. Now, it’s been commonly assumed that if you can buy a car outright, you should, but is that really true?
Let’s take a look at both options a little more closely.
Paying for a Car Outright
Saving up until you’ve got enough money is the traditional way of purchasing your first car, especially if you want a new one. In some ways it’s the easiest option to comprehend: you go to a dealership, pick out a car, pay for it, and then take the merchandise home.
When you’re able to buy a vehicle with cash, there aren’t as many documentary requirements. You don’t have to present bank statements, pay slips, or any similar records to prove your capacity to pay for the car. This makes it ideal if you prefer a straightforward arrangement (or if you’re on the run from law).
Your credit score is immaterial.
So long as you have enough cash, you’re good to go.
Full ownership upon payment.
The moment you pay for the car, it’s entirely yours. There’s no danger of it getting repossessed because there’s no risk of you defaulting on any installments.
No interest rates or regular payments to worry about.
When you pay in cash, you can save money on interest rates and processing fees. Also, if you already have an existing vehicle, you can trade it in for a new one and thus avail of an additional discount.
It does your credit score no favors.
No debt, no credit score. If you plan on taking out a home or business loan in the future, you will need a good credit score. Buying a car on credit, especially when you can afford to pay the full amount, can help you do just that.
Your money would be tied up.
Once you pay full price, you can no longer use the cash to earn interest in the bank, settle existing debts, or put it towards pressing investment opportunities that could make you enough to pay off the interest payments on a financing deal and then some.
This option often gets a bad rap since it involves taking on debt, but there are good debts and bad debts, and car financing can be classified under the former when done right. It also lets you avail of a car long before you can afford paying for it in one go, but it’s not really suitable for those who are having difficulty paying their existing debts as it is.
It’s potentially good for your credit score.
Obtaining a car through financing is a good way to build up your credit score so you can get approval for bigger loans down the line should you need them. Provided that you make your installment payments on time or perhaps earlier, that is.
Extra cash is freed up for other expenses.
Even if you do have enough money to purchase a car outright, you can put most of it to better use under a good financing scheme.
With financing, a small down payment can be sufficient for buying a car, so you can use the rest of the cash to generate interest at the bank through time deposits, buy good stocks on the market at a great price, or pay off more substantial debts in the meantime.
In some cases, the money you can earn from investment opportunities can even pay off the interest rates on your financing scheme every month.
Financing can help you get a better car than the one you can currently afford.
For cash payments, AU$5,000 will only get you an AU$5,000 car. Under financing, however, your AU$5,000 can serve as a down payment for a much nicer or more cost-efficient car, regardless of the cost.
All car financing plans come with interest payments because that’s how financial institutions that offer them make money. If you have a good credit score, on the other hand, you might be qualified for lower interest rates.
Don’t forget other costs like processing expenses as well.
It leaves you with a smaller budget over the long term.
If you opt to finance your car purchase, you’ll have to be even more disciplined in sticking to your monthly budget, at least until you’ve paid it off in full.
Delaying your payments or worse, defaulting on them entirely, could wreck your overall credit score and result in your car getting repossessed.
So, given that you’ve saved up enough cash to buy a car, which option is better for you? The answer depends on your financial situation and how far along you are in achieving your financial goals.
If you can afford to pay for your new car in one go, but would like to put aside some of it for other expenses such as debts or investments, financing is likely to be a better fit in this case. On the other hand, if your credit score is less than desirable and/or the interest payments exceed how much you could make if you invested the remainder of your money elsewhere, a one-time sale is probably more apt.
Whatever you choose, be sure to shop around for the best deal before you fork over your cash or sign on the dotted line.