Cars are an essential part of everyday life. According to the Department of Transportation, there were more than 270 million vehicles in America by 2018. And, millions more are bought every year. However, purchasing a car requires deep pockets.
Given a choice, most people would probably pay cash. Unfortunately, that option is not available to everyone. The good news is that getting a car loan has become simpler. This article looks at what you need to know before going one way or the other.
Reasons to Pay for a Car with Cash
Paying cash is one of the most straight-forward ways of buying a car. You walk into a showroom, pick what you fancy, pay the full amount, and drive off owning 100% of the vehicle. Who wouldn’t want that? The following are some of the reasons why you should consider paying full cash if you can afford it.
1. Cash Discounts
Most auto-dealers prefer if you buy using a car loan as this means you get to pay more. However, when faced with either waiting for monthly payments spread or getting full one-off payment. They will choose the latter every time.
Footing your bill tilts the scales in your favor. Auto dealers will sweeten the deal to avoid losing money. You leverage this to get excellent discounts. In the end, you buy the car way cheaper than if you had gone for a car loan.
2. No Monthly Payments
Car dealers will make you feel like you got the deal of the century. However, you quickly realize it wasn’t right the moment the first payment is due. You will have to keep making these payments for years.
Adding another bill to your already high expenses can stretch your finances to its limits. On the other hand, paying cash gives you financial freedom to afford a bigger home or save more for your retirement.
3. You can Resell the Car Easily
The biggest advantage of paying in cash is that the car effectively becomes yours. You can do with it as you please without any restrictions.
Should money become tight in the future, you can quickly lease it out on a loan, or sell the car and get money to survive on. You would be worse off if you are yet to complete your car loan payments. The vehicle will most likely be repossessed, adding to your financial woes.
4. Saves You Money
Paying a massive sum of money at once may not look like the best way of saving money, but it does. In addition to the cash discounts, you will be less inclined to buy a more expensive car. Car dealers are notorious for talking buyers into upgrades they don’t need.
It will be impossible to overbuy since your purchase will be dictated by the amount of cash you have. An upgrade to higher trim translates into higher insurance and maintenance costs. Paying cash also spares you from the loan fees and interest. If you do the math, it saves you quite a considerable chunk of change.
5. Cars Depreciate Fast
It a well-known fact that a car begins to depreciate the minute you drive off. Yet, most buyers don’t realize the implications. On average, a vehicle depreciates by up to 20% in the first year and another 15% every subsequent year. This situation is what is called negative equity or upside-down car loan. It means you will still be paying interest on a car for more than its worth.
In other words, the dealership will still be charging you as if the vehicle is still new for the duration of the loan payments. It makes more sense to be making payments on something that appreciates like real estate.
Top Reasons to Get a Car Loan
Contrary to popular belief, a loan is not always a bad idea. It is why even some reasonably wealthy people still opt for car loans.
According to a report by the United States Public Interest Group (USPIG), 85% of new car purchases and 53% of used car purchases in America are financed. Try to shop around first before committing to any institution. Potential lender includes banks, manufactures, dealerships, credit unions, and online lenders. Here are some of the reasons why car loans are quite popular.
1. Low-Interest Rates
Interest rates determine whether you borrow or not. When interest rates are at their lowest, then financing is the best option. The amount of interest depends on the types of car loan you took. For instance, a new car loan attracts a higher interest than a used car loan.
You are free to negotiate suitable interest rates with your lender. Buyers with an excellent credit score can be offered a 0% annual percentage rate (APR). It means you won’t be charged interest for a specified period, giving you time to get your finances in order.
2. Build Your Credit Score
Financing your car purchase is a great way to get your credit score out of the dump. If you manage to service your car loan consistently, your credit score will soar in no time. By proving your creditworthiness, lenders will be more inclined to offer you future loans.
Your loan limits will also continue to grow. It puts you in an excellent position should you need money to fund more significant investments in the future. Other benefits of a good credit score include better car insurance terms and faster approval for rental units. In short, it gives you a better negotiation power for all your future transactions.
3. Protects Your Savings
Paying cash might mean having to empty your savings account to foot the bill. Having zero savings is a very precarious situation. If you lose your job, having a car will be the least of your worries.
Experts recommend having at least six months of earning in savings. It will cushion in case the unthinkable happens. A car loan will allow you to afford a car without breaking the bank. Smaller monthly payments are more comfortable to squeeze in a budget until you get on your feet.
4. Requires No Collateral
In addition to being cheaper than all other unsecured loans, car loans require no form of collateral. This means you don’t have to risk your other assets like your home. Your lender considers the car itself as the collateral against the loan.
If for whatever reason, you are unable to service the car loan, only the car gets repossessed. Of course, nobody wants that, but it helps to know you won’t lose anything else.
What's Better? Cash or a Car Loan?
It would be nice to tell you that one route is better than the other. However, the truth is that both have excellent benefits. Ultimately, you will have to make a decision based on the circumstances. If you can afford to pay cash and still have enough money left in your saving accounts, then without a doubt, pay cash.
Unfortunately, not everyone has that option. Car loans can be a lifesaver if owning a car is critical for work purposes. You just need to be cautious when it comes to loans. Think about your credit score, the prevailing market conditions. Explore all the car financing options available to you and choose one with the most favorable terms. Provided you have a clear picture of your financial situation, do what works for you.