• Jennifer Snyder

Cash or Finance?

There are some people who have amassed a large enough amount to purchase a car for cash either through strict saving or large income. Then there are others who only have enough to cover a short term emergency fund or no savings at all. This is why a financing option is available. Financing gives you the option of paying your loan with interest, over a period of time instead of in one lump sum. If you have the ability to choose between either, what are the advantages and disadvantages to each?

Benefits of Financing Your Car

Financing a vehicle can have many benefits—especially if you don’t have the cash on hand to write a big check for your car.

  • You can build your credit score if you are on time and consistent in making your monthly payments.

  • If you create a solid relationship with your lender or dealer by making your payments, this could have benefits for you in the future—like a lower interest rate or an easier time getting approved for future credit needs.

  • With a good credit score, you could receive a very low interest rate—and thus pay only a small amount in interest.

  • Without the need to write a big check for your car, you can free up money each month for other needs in your life.

Disadvantages of Financing Your Car

If you are like most people, and can’t afford to pay for a new car upfront, you’ll need to either take time to save up for one, or finance for the car you want. Financing is a great option for most people, but there are some issues when it comes to the question of, “should I finance a car or pay cash?” If financing is the only option at the moment, here are some potential downfalls of choosing to go the car loan route:

  • The worst part of financing could be the interest charges. You could be paying hundreds, even thousands, more on your loan just in interest. If you paid cash, you won’t have any interest charges. This is especially true if you have credit challenges as your interest rate may be very high.

  • Typically, while you are financing your car, your lienholder will require you to carry full-coverage insurance. But if you paid cash, and are the owner of your car, you may have the option to purchase liability-only insurance—depending on your state’s requirements.

  • Whether you want to finance or pay cash for a car, we can help you at AppCore.Com. After you fill out our free, no obligation application, we will do our best to connect you to a lender who wants to help you get the car you need, and with financing—if that is the route you’ve chosen. Hopefully we can help you get the car you need, at the price you want!

Benefits of Paying with Cash

  • By paying in cash, you will lose no money in interest. Interest is a fee charged to the purchaser for borrowing someone else's money. It can range from 0% to 25% or more.

  • By paying in cash, you don't risk spending the money. If you’ve saved up enough for a car, and choose to finance, you may end up spending the money that you saved up, rather than applying it to your loan. By paying cash, that money is out of your hands, and your purchase is completely paid off.

  • You won't have monthly payments. Debt puts many people into financial troubles. Oftentimes, we spend more than we can actually afford because we know we can pay our purchases off over time. But, this kind of mentality could cause you to take on too much other debt because you “only have to pay $300 per month” on the car. With this kind of thinking, you may end up taking placing yourself in a tough situation.

  • You don’t have to make payments on a depreciating asset. By paying off your car immediately, you will never be underwater on your loan (meaning you owe more on your car loan than the vehicle is worth).

Disadvantages of Paying With Cash

Believe it or not, it may be okay to choose financing over paying by cash in certain situations, as there some potential downfalls to paying cash.

  • A low interest rate could save you money. If you can get approved for an extremely low interest rate, you may want to consider taking on a short-term car loan. Borrowing money at 2.25% interest, for example, could make a lot of sense. Especially if you can make more money investing the cash elsewhere.

  • A low interest rate loan could even help you make money. If you pay cash for your car, you won’t have those thousands of dollars in your own bank account – or invested in income generating opportunities – so borrowing may allow you to make money if your investments pan out.

  • Making reliable payments could help boost your credit score. If you are trying to establish credit – or trying to improve your overall credit score – taking out a car loan could really help you. Keep in mind that you need to make your payments on time and consistently or you could end up hurting your credit score.

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