Buying a car. It’s a rite of passage many young adults go through and is the first big purchase for most. Maybe it’s made at the tender age of sixteen after years of dreaming of the perfect car.
Maybe it’s made to provide reliable transportation to a first job or even years after having reliable, steady income. No matter when that milestone is reached, one of the biggest questions to answer is this: how exactly are you going to pay for it?
Financing your purchase
Let’s pretend that you’re looking to buy a car for $20,000. If you choose to finance your purchase, you will be able to make a down payment rather than pay the entire $20,000.
You will need take out a loan for total cost of the car minus your down payment and you will agree to pay interest over time. Your monthly payment will be based on the actual purchase price of your vehicle and the interest rate that you get on your loan.
But, doesn’t that mean that you will pay more for your car than if you bought it outright?
Yes. Any time you’re in a situation where you are paying interest on a loan you will be paying more over time.
Not everyone is able to pay for a car out of pocket, so here’s a little secret.
Car dealerships are in the business of selling cars, not financing. They are more interested in making sure that you make that purchase than in charging you high amounts of interest. For that reason, many will offer very low interest rates, especially if you have excellent credit. This means that you get to make a reasonable down payment and still drive off in your new wheels.
Paying cash for your purchase
Now, let’s think through another scenario. You still want to buy that same car for $20,000. You save up, setting money aside every paycheck to get ready for that purchase. You finally reach your goal and walk into the dealership, ready to put all that hard-earned cash towards your new wheels.
Paying for your car outright means that you will pay the agreed-upon price for your car, not borrowing any money. Every month that you drive your car, you won’t pay a dime. You paid it all at the beginning when you made the purchase.
So which is the better option?
It really depends on your priorities and budget. Many would look at these two scenarios and think that financing is the best way to go. You pay less up front, don’t pay much, if any, in interest, and don’t have to wait for years and years of saving to buy a car.
If you need a vehicle and don’t have the cash on hand, financing can be a great option. It is also something to consider for those with excellent credit, as the dealership will often offer interest-free financing for those with a history of making payments on time.
Paying cash up front for a new car is something to consider for those with extra money available. Some prefer to own their car outright and not have to worry about a monthly payment. If you like the simplicity of not keeping track of monthly payments, this might be the option for you. For those who are particularly diligent, you may even consider taking the money you would have used monthly for a payment and invest it.
In most cases, financing a car is a great option. That’s why more people than ever are choosing this path to getting a new car.
According to the Federal Reserve Bank of New York’s May 2017 Quarterly Report on Household Debt and Credit, over 107 million Americans have car loans. But buyers should be aware of what they are agreeing to before signing anything.
Interest rates are especially low, but for those with less-than-stellar credit may find themselves offered a loan with high interest rates. This means that you will end up paying a lot more over the life of the loan, with monthly payments that may be hard to afford. Ultimately, it will come down to your individual situation. You should consider your ability to make monthly payments, the interest that you will be charged, and how much you have to put down on a new car. Hopefully you’ll be driving off into the sunset, the wind streaming through your hair, and your budget nice and happy!
