So you’ve decided to buy a car – you’ve been saving up for months, doing your research, and you’ve finally settled on the model you want, from a dealer you trust. For a car purchase, everything is going swimmingly – you’ve hammered out a price, and you know how much you can afford. At this point, there’s one decision left: to pay with cash, or to finance?
As simple as this may seem, it’s actually a pretty loaded choice. While financing a vehicle from bad credit auto dealers may be distinctly advantageous for several reasons, there are also benefits to paying with cash up front. Likewise, each option has its distinct negatives too, and these should help you decide which route you feel most comfortable taking.
Before you hand over any cash or sign onto a loan agreement, it’s best to consider the pros and cons of both up-front cash and long-term financing when buying a used car to pick what’s best for you. Not only could this save you a lot of time and headaches, but could also end up being the difference between paying or avoiding thousands of dollars added on to the cost of your new car.
Here’s What’s Good About Each Of These Options
When it comes to actually paying for your new or used vehicle, there are distinct advantages to both paying up-front in cash and in financing – and it’s critical that you figure out which is the better option for your financial situation.
Benefits of Paying Up Front In Cash
Take paying in cash, for instance. By paying for the full cost of the vehicle at signing, you are able to completely avoid interest payments – a huge boost to the money conscious buyer looking to pay only what the vehicle is worth. Since interest payments are the majority of the way a dealer makes money, this is a good way to minimize the cost of your vehicle and free yourself from having to worry about a monthly car payment.
Paying in cash can also give you substantially more negotiating power with the dealer, who is looking at a big windfall of cash right off the bat and will likely be more willing to make small negotiations as a result. This could result in actually lowering the advertised price for the vehicle, saving you even more money just by virtue of your being able to pay right away. This is an attractive option to dealers in many ways, and an unattractive option in others.
Walking into a dealership with several thousand dollars at your immediate disposal, however, is a great way to get the dealer’s attention and show him or her that you are serious about finding a good car at a quality deal.
Benefits of Financing
By financing a car, however, you also set yourself up for some notable benefits, including a chance at improving your credit score as a whole. That’s because taking out a bad credit auto loan, even one at a high interest rate, can actually help your financial situation – provided, of course, that you make all of your payments on time. Many consumers who take out a bad credit car loan do so because of a poor credit score, and a bad credit car loan can be one of the easiest kinds of loans to secure, and thereby one of the easiest ways to start getting your reputation as a lender back on the right foot.
Buying a car on a loan can also help you better manage your investments outside of your car payments, as it frees up more of your money with lower payments each month. Although this will cost you more in the long run for the total amount of your car, this kind of portioning out payments into smaller chunks can help free up much-needed cash for your other expenses.
Finally, by choosing to finance your new car rather than buying outright, you give yourself more options as to the kind of car you can afford. When you buy with cash you are limited to those vehicles you can afford right now whereas by financing a vehicle you allow yourself to pay off a more expensive car at a slower, more manageable rate. For those looking for models outside their immediate price range but not outside what they can pay in the long term, then financing may be a better option for securing that new or used vehicle.
Or, similarly, taking out a loan on a car allows you to take the money you would have otherwise paid up front for a less expensive vehicle and put it toward a down payment on a newer or more expensive model. This opens up many more options to you than you would be able to find by limiting yourself to what you can pay for up front.
…And Here Are Each Method’s Disadvantages
Unfortunately, there’s no perfect option. Each of these avenues of payment bring along plenty of negatives to each, and so here’s a rundown of the negative aspects you can expect from each type of payment method for your new car.
Paying With Cash
Although almost guaranteed to save you money, there are still a few disadvantages to paying for your car outright with cash up front.
Obviously, the most immediate disadvantage is the sudden windfall of cash you’re going to lose. Spending several thousand dollars all at once can be a serious hit for your bank account, especially if you don’t have that kind of flexible cash around all the time. Such a big hit can draw your spendable cash out of other investment or limit what you can spend on other critical needs, and so making such a big payment right off the bat can be relatively impossible for a lot of car buyers. Plus, since you can only afford what you’ve got on hand, your choice are limited to only what you can afford on that day.
Similarly, the dealer will likely consider your choice of payment in how he or she prices the vehicle for you. Since the dealer makes his or her money off of interest, those paying with cash represent less of a gain to a dealer and so, oftentimes, the cost of financing is built into the price of a vehicle. While a dealer may decide to lower the price on a vehicle because you’re paying in cash, he or she is still trying to make a decent profit off of the sale – and you should expect that difference to be included in the base “cash” price of your vehicle.
Disadvantages to Financing
While financing can open up plenty of new options to a car buyer, there are also disadvantages to financing that a smart borrower should be aware of.
When you buy a car outright with cash, you own that car fully from the moment you drive off the lot. That means you never have to worry about missing payments, or having your vehicle repossessed. With a loan, this is not the case; you could pay a large down payment and pay for years into a loan, but miss a couple of payments and the car can be repossessed and the full cost of the loan due. While you may have more expensive cars available through financing, this method also offers far less security to the buyer from losing everything they’ve put in already because of a few missed payments.
Also, taking out a loan is inherently a risky financial move, as you are voluntarily putting yourself into debt for the sake of a material possession. Not only that, but you when you finance you are significantly more likely to shop outside of your price range with the hope that you’ll figure it out by the time payments are due. And since you can expect to pay hundreds, if not thousands more in interest, this becomes a very real possibility when financing a car.
Although there is really no right or wrong way to buy a car, it’s important to be aware of the differences in choosing each of these payment methods. It’s best to assess your personal finances and car-buying situation before making any hard choices, but simply knowing these advantages and disadvantages could hep you make a smart financial decision later on down the road.