Should You Pay In Cash or Finance Your Car?
April 21, 2014 / Sara Davis / Be a Savvy Car Shopper
If you are in the market for a used car and have the money to pay for the whole car in cash, should you?
It may seem irrational to propose not spending cash on something that is within your budget, but there are major financial drawbacks to buying a car with cash.
Be sure to consider these downsides of paying cash for a car before cutting a check.
No Credit Score Benefit
When regular payments are made on a car loan, credit is built. For those with no credit history, this is a wonderful way to create or improve your credit score.
If cash is paid for the purchase, you obviously aren't taking out an auto loan, which is a important part of establishing credit history and your experience with different types of credit.
Having only credit cards typically isn't enough to make it to the top tier of the credit range.
Limited Car Options
If the buyer is thinking about paying with cash, when they go car shopping, the search is limited to only those cars within a certain budget - and is often much less than normal.
If that person's dream car is found but it is out of their cash budget, there is no leeway to buy it.
Paying cash may cause buyers to settle for a car that they don't really want, or that has mechanical or cosmetic issues and that may lead to greater unhappiness (along with an empty wallet) down the road.
Less Money for Other Purchases
Most people do not have significant savings, so when a large purchase for something like a car is made, there is a substantial hit to their bank account.
However, should a car be obtained on credit, this frees up money for other purchases or for a rainy day. Especially at times when other drains on your paycheck should take priority, like saving for a down payment on a house or paying for college tuition, this is not the time to spend a large amount on a car.
Spacing out the payments over months helps to keep cash available for other important expenses.
More Money Out of Pocket for Leasing
If the car is being used for work purposes, the best option is to lease.
A company will reimburse neither the interest on car loans nor the full asking price, but lease costs can typically be reimbursed. The best use of money in this case is to lease the car and be reimbursed for the lease payments.
Can't go wrong with that.
However, it is not always disadvantageous to buy a car with cash.
- The car will cost less if there is no interest to pay or other fees to consider when financing a car.
- The bank doesn’t own the car, which allows for more freedom concerning insurance coverage.
- You fully own the car and can do with it whatever you please. Sell it, customize it, drive for Uber in it.
With the above drawbacks considered, are the benefits of buying with cash worth it?
Both in the short term at the car dealership and the long term on your credit history, using credit for a car purchase is often the more advantageous option.
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