It’s 2022 and car buying has certainly putting a damper on spending budgets. In fact, the average buyer who sets foot into a dealership nowadays will spend close to $50,000 for a purchase deal. Compared to years past, this new normal is taking drivers by surprise, forcing many to ask the question: “Is it better to finance or pay cash?”
While you may consider both options before agreeing to a deal, there are pros and cons to each, no matter how much money you have sitting in the bank. For instance, financing won’t tie up all your money at once and make monthly payments more manageable. By the same token, cash deals allow drivers to live debt-free and avoid credit utilization which can impact your financial history.
Generally speaking, there’s a lot to consider here. And, we suspect that most drivers will have differing opinions depending on their own financial state. With reports showing that there has been a 42% increase in borrowing due to rising consumer prices, it might be the best time to assess the pros and cons of financing or pay cash.
Advantages of financing a purchase
As inflation woes have hit millions of household this year, the option to finance has become more prominent than years past. Here’s a few reason why you may want to take out a car loan versus saving money longer for your dream car.
Pros:
- Payments are spread out over time. Financing allows drivers to feel temporary relief from the overwhelmingness financial obligations of a big purchase, such as a new vehicle.
- Helps build a credit history. If you make on-time payments and develop a good standing with lenders, an auto loan can actually lead to a better credit history.
- You can invest your cash somewhere else. By freeing up your savings account, drivers can utilize their cash for other important expenses, such as purchasing a house or adding to a retirement account.
Cons:
- Interest can add up to thousands of additional dollars over time. Which means, the cost of financing your car in addition to the amount of time it takes you to pay off the loan could cost you more in the long-run.
- Borrowing at a high percentage can adversely effect your credit history. If you’re using a credit card to pay for a new car, consider the ratio at which you are charging. High balances will directly lower your score.
- Interest rates could limit your future savings. While interest charges might not seem like much each month, it ultimately prohibits you from putting less money aside each month for other life expenses. Make sure to consider how important a specific car is before taking out a loan or racking up a high credit bill.
Advantages of paying cash
Most money experts will tell you that cash is king and to avoid getting in debt at all costs. However, similar to financing, paying cash has a list of benefits and drawbacks as well.
Pros:
- You pay the full amount up-front. A cash purchase means you don’t have to worry about auxiliary charges from financing a loan.
- You’re living within your means. Simply put, paying cash keeps buyers in the right financial mindset and thus reduces the financial stress of carrying debt around for a five year span or longer.
- The new car purchase won’t hurt your credit score. Compared to financing, a cash purchase won’t cause any unintended harm to your credit history.
Cons:
- In contrast to the previous statement, paying cash doesn’t necessarily help your credit score either. In truth, a cash purchase will do nothing to help your relationship with lenders which could factor in to your ability to borrow in the future.
- You could wipe out your savings. Though paying cash avoids things like interest charges and financial stress, it can also deplete you of your savings. This leaves you in a sticky situation when emergency funds are needed.
- You miss out on potential rewards. With some creditors, purchasing a vehicle counts towards substantial rewards. Shoppers often consider this option if they are borrowing a smaller amount for a vehicle purchase.
Best times to finance or pay cash
While paying cash upfront has plenty of benefits, in some circumstances, it can be more manageable to finance a purchase. Drivers can feel relieved not to have all their money tied up in one investment. Here are the times when opting for financing is the better choice:
- You’re buying a new car. The high cost of new vehicles forces the majority of shoppers to secure financing.
- If you have great credit or qualify for a 0% interest credit card that allows you to pay off the loan quicker.
On the contrary, you may want to pay with cash when:
- You don’t qualify for good rates. If you’re not eligible for low-interest on a loan, paying cash helps avoid unbearable interest charges.
- Financial planning is not your strong suit. If you have trouble paying on-time, financing a loan could put you in deeper trouble.
Overview on when to finance or pay cash
Before you can decide whether financing or paying cash is the better option, the first thing we recommend for shoppers to do is check their credit score. Most times, this will be the biggest indicator on if financing is a viable option for you. A good credit history will heighten your chances of securing a loan without paying sizable interest rates.
All in all, the option you choose will come down to your own personal financing. Are you responsible enough to keep up with monthly payments? Should you be borrowing money for such a large investment? These are the hard-hitting questions that buyers should ask themselves before getting involved with the financing route.