There are two main ways of buying a new car: in cash (paying the total cost in full with your savings), or with auto financing. Although it might seem like common sense to just pay upfront with the cash you saved rather than taking out a loan, it’s not always the case. Even if you have some cash in reserve, taking out a competitive auto loan can have a lot of advantages which include:
- Not paying the total cost in full means keeping more of your cash in savings. This gives you a little liquid flexibility and also leaves room for an emergency fund to draw on only if you need it
- You can put that savings into an investment with a much higher interest than the interest on your loan
- If you already have a rainy day fund, you could reallocate your savings toward retirement planning
- Taking out a car loan spreads your payments over a longer term, avoiding a sudden hit on your financial situation
- With financing, you’ll own 100% of the vehicle at the end of the repayment term, yet you’ll still have the cash sitting unspent in your account
Choosing between car credit and cash
As with most areas of finance, there’s no hard and fast rule for choosing between credit and cash. The details of your financial situation have a huge impact on your decision, so start by asking yourself these questions:
- How much money do you have saved, and how much can you safely use for a car purchase?
- How much debt do you already have, and could extra auto finance be too much of an added burden?
- Do you enjoy enough income to ride out any sudden expenses which an emergency fund might cover more easily?
- How good are you with your finances, and are you sure keeping up repayments will be Like a no problem?
As you honestly answer these questions, your decision will start to become more clear. If paying in cash will leave you financially hollowed out, then a loan will give you more peace of mind that you have a financial buffer to handle any emergencies that crop up. It will also spread out the cost of your purchase to make it more affordable.
On the other hand, if you already have significant debts, using savings to buy a low-cost car may make more sense rather than adding to what you owe. It could also give you some breathing space to improve your financial situation for the future when taking out a car loan may be more affordable and sensible.
Taking out a loan should be a thoughtful decision. But once you take all these factors into account, an auto loan can often be the more prudent financial choice depending on your situation.