Should I pay cash or get a loan to buy a car? Which is better?

June 11, 2022 at 10:29AM
2 minutes read

“Why should I bother paying monthly for a car when I can afford it now?” This question is most asked when a person has enough money to pay for a brand-new car in cash. However, it does not always apply to everyone, particularly employees who make just enough to cover their daily expenses and have minimal savings. If you're thinking about buying a car, you'll need to weigh the pros and cons of paying cash or taking out a loan.

Auto loan or cash

Auto loan or cash

Cash

The most simple and straightforward of paying for a vehicle is to use cash. Paying cash avoids you to pay an additional cost that comes with car financings such as high-interest rates, and other charges. However, there are some cons you must be aware of as this could result in missed opportunities.

Pros

  • No additional cost to pay. You don’t have to worry about the additional cost of borrowing such as interest.
  • You only spend what you can afford. Spending what you have on hand keeps you from going over your budget.
  • No auto loan. You owe no money to the bank or any other car financing company because you paid it off in full.
  • Outright ownership. Once you paid it, you own it.

Cons

  • It does not enhance your credit score. If you finance a vehicle, you will improve your credit score and be able to earn lower interest rates in the future if you pay your monthly bills early or on time.
  • Missed Opportunity for Low-Interest Rate. On a new vehicle, a brand may sometimes offer lower interest rates or perhaps no interest at all. If the buyer loans the car through an automaker-affiliated institution, the dealer may give significant discounts. This is a chance you don't want to lose.
  • Early depreciation. Depreciation begins automatically after the car is released from the dealership. If you plan to resell the vehicle on the secondary market in the future, this will have a substantial impact on the selling price.

Financing

Car financing gives you flexible options to choose from. There are several banks and other financing services that offer auto loans.

Pros

  • Easy to get a vehicle. Even if you are on a tight budget, banks can offer you a car loan
  • You get the option of getting a better car or a higher trim-level model
  • Allows you to pay for your vehicle in installments
  • Flexible monthly rates and down payment options

Cons

  • You have to pay the cost of borrowing – the interest
  • You don’t own the vehicle until your last payment
  • It is difficult to extinguish a loan when you’re in a financial difficulty
  • There’s a possibility that your car will be repossessed especially when you missed a series of payments
  • It can negatively affect your credit score or rating. This holds true if you miss out on your monthly payment.

There are several factors to consider even if you can afford it in cash, some people prefer to take out a loan. So, it depends on your current financial situation. With that in mind, we'll go over some typical circumstances for deciding whether to buy a car in cash or take out a loan:

  • Use for the Business. If you own a business and a vehicle is required for daily commuting or as part of the operation, such as for Uber or Grab, it is preferable to take out an auto loan. Don’t worry about the interest; you can cover it with your monthly business earnings. Even if your company has sufficient liquid cash, save it for other purposes such as investing it in the stock market, or purchase it in the real properties to earn and expand, and others.
  • For Personal Use. This depends on the financial capability and the characteristics of a person. It is advisable to take out an auto loan if you have a steady monthly income (such as an employee). Some employees, however, prefer to pay it in cash since they do not want the burden or hassle of paying the monthly amortization.

In general, an auto loan is always better than a cash payment. Purchasing a brand-new car is costly and paying cash for one means passing up an opportunity to invest in an income-generating asset like real estate.


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