The short answer is—it depends.
With a cash car purchase, you pay the entire amount upfront, meaning you own the car outright and don’t have to make any monthly payments. Financing means taking out a loan to cover the cost of the vehicle, which requires monthly payments until you pay off the loan.
Pros and Cons of Financing a Car Purchase
Let’s explore the pros and cons of financing a car purchase vs. paying cash.
- Lower Monthly Payments: When you finance a car, you pay the interest over the life of the loan, so your monthly payments will be lower than if you pay in cash.
- Refinance Car Loan: If your financial landscape changes after you finance, you may be able to refinance your loan. For example, if you have good credit, you may be able to secure a lower interest rate.
- Build Your Credit: If you make your monthly payments on time, you can build your credit score, which can be helpful if you want to take out a loan for another major purchase in the future.
- Getting the Best for your Buck: If you opt to lease a car with the intention of purchasing it once your lease ends– you may be able to get the luxury you want at an affordable monthly price.
Now that you understand some of the pros—let’s look at some reasons financing a car may not be ideal:
- Owing More Than the Car is Worth: Cars depreciate over time, and if you have a longer-term loan, you may end up paying more for the car than it’s worth.
- Limited Budget: When you take out a car loan, you are essentially borrowing money you will need to repay, which means you will have less money for other things, like groceries, vacations, etc.
- Car Repossession: If you default on your loan, the lender could repossess the car, leaving you without transportation and damaging your credit score.
Pros and Cons of Purchasing a Car with Cash
When you’re looking to purchase a car and have the means to go the cash route, there are a few things to think about– cash on hand or not.
- Save on Interest: When you finance a car, the lender charges interest on the loan, which can add significantly to the car’s total cost. However, if you pay in cash, you’ll only have to pay the sticker price.
- You Won’t Need Good Credit: If you don’t have good credit, getting approved for an auto loan can be challenging. However, your credit score won’t be a factor if you pay cash.
- Avoid Depreciation: When you finance a car, the vehicle’s value begins to depreciate immediately. If you pay for the car in cash, you will own it outright, so you won’t have to worry about devaluation.
- No Monthly Payments: Monthly payments can be a significant financial burden, and by paying for your car in cash, you can free up money each month.
If you have the cash to purchase a car, you may be tempted to do so. Here are a few reasons why you may reconsider:
- You May Miss Out on Incentives: When you finance a car, you may be eligible for specific incentives, such as low-interest financing or cash-back offers– these incentives can save you money in the long run.
- Need to Save Up First: If you don’t have the cash on hand to purchase a car outright, you will need to save up for it. This can take time, delaying your purchase by several months or even years.
- Tying Up Your Money: Purchasing a car with cash ties up your money in an asset that depreciates over time. So, if you need to access your money, you may need to sell your car or take out a loan.
The Bottom Line
There are pros and cons to financing and paying cash for a car purchase. It’s crucial to weigh the options before you make a decision that will impact your finances for years to come.