Borrowing versus Buying Outright

No doubt about it - paying for your car in cash will save you money. For example, you will save $2,783 in interest payments on a $22,000 car over 60 months at 4.79 percent interest. Furthermore, the money you save up front and over time will be available to use for other things such as gas, upkeep, repairs, and the full payment on your next car. In fact, if you put the estimated car payment you would be making into a savings plan each month, you will be making money on your money instead of the lender making money on it. So, financially, you are definitely coming out ahead. Another benefit to paying for your car in full is that you own it. You never need to worry about it being repossessed or falling behind in your payments.

There are a number of good reasons for not paying cash. Because of the recent concerns about identity theft and Homeland Security issues, many dealers do not want to accept cash for a car. Some will not even accept bank or cashier’s checks. Of course, there may be a hidden agenda in their refusals. Convincing you to take out a loan creates additional cash flow to them.

A Loan May Give You An Edge in Negotiations

One of the best reasons to take out a loan is that it gives you a negotiating edge. Contrary to what you may have heard, dealers do not give you a better deal if you have the cash in hand. They are eager to have you finance the car with them, and are willing to negotiate to get you to do so.

Another reason for taking out a loan is to free up your cash for other needs such as home improvements, tuition payments, or investment opportunities.

Also, if you want to keep your credit rating healthy, maintaining a car loan is one way to do it. So, rather than pay off the entire cost of the car in cash, you may consider placing a substantial down payment to keep your loan small. The extra cash you keep in your pocket and the good credit you maintain may come in handy if you plan to buy a new house or suddenly need a new roof!

Shopping Around Takes Time

Shopping for the right loan can take as much time as shopping for the right car and the difference between a good choice and a poor one can cost you hundreds of dollars. Then, you will also have that monthly payment to make, with the possibility of defaulting if something happens to your income. Just remember, if you decide to finance your car, keep your eyes wide open and kick the tires to make sure you have the best deal.