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Whether to finance a car or always pay cash is an age-old question. Today, more than 70% of consumers finance their vehicles. They choose to do so because they either a) don’t have the cash to purchase a vehicle outright, or b) would rather keep the cash they have in savings, and spend more in the long run for the convenience of monthly payments. If you can pay cash for your next car, you have to ask yourself if you should. There are good points on both sides, so let’s look at them so that you can make an informed decision.

Cash

The cash-only pundits point out that paying cash saves you money. That savings comes from the interest that you do not have to pay on a loan. Here are other pros of paying with cash.

  • No monthly payment.
  • Only need liability insurance, which saves you money.
  • Possible to negotiate a lower price when paying cash (this depends on your haggling skills).
  • No worries about repossession if you lose you job.

Financing

The main pro of financing a vehicle is in the boost to your credit score you receive when you make your payments on time. Since FICO bases 35 percent of your credit score on payment history and another 10 percent on the types of credit that you use, a car loan can address a total of 45 percent of your credit score. That means that you can cause your score to jump greatly with one loan. Of course, that jump only occurs if you make on-time payments…at least twelve of them, preferably 18. You will find it extremely difficult to obtain a mortgage if you have never had an auto loan and at least one credit card, both with solid payment histories.

Another reason that people opt for financing is to keep their cash in savings. This does not save you money, because chances are you will pay more in total interest than you earn in interest from a CD or savings account. However, some people are simply more comfortable keeping their cash in reserves, and they are willing to pay a premium for this convenience. If you have great credit, then your interest rate might be so low that this won’t be as much of a concern. However, if your credit is less than prime, then financing a car could cost you thousands more than buying it with cash.

 

About the author: Jerry Coffey

 

Jerry Coffey is the financial expert here at AutoFoundry.com. A recovered "debtaholic," he now preaches frugal-living and sound money management here and at Repaid.org, where he is the chief contributor. He works for a major automaker.

 

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  1. Pingback: The Hidden Costs of Buying a Car without a Down Payment | Club Thrifty

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