If you are considering purchasing a car, you may be struggling with the decision of whether to pay for a new car with cash or finance. This is a common mystery for new car buyers. Both have advantages and disadvantages, and the correct answer usually depends on what makes the most sense in your situation.
We cover both sides of the equation – lump-sum cash purchase versus lender financing. We will also discuss a common third option that combines the first two.
The main benefit of buying a car with cash
Let’s be clear – most people don’t have large sums of cash in their savings accounts just waiting for a big purchase, such as a new car. But if you do have thousands of dollars tucked away somewhere, there is a clear benefit to purchase your new car.
The main benefit of a cash purchase is that you get to avoid paying interest.
If you have the money it may seem as if you don’t have to worry about paying for the car and avoiding monthly interest, but it’s not always the best option for the reasons we’ll explain below.
Benefits of financing a car purchase
The great advantage of financing your car purchase over cash payment is that you can buy your car now without paying a single dollar upfront. Zero down payment contracts are quite popular for the simple reason that many people either don’t have savings or don’t want to part with their savings. As mentioned, signing up for a loan usually comes with an expense that is included in the monthly payment known as “interest”. But there are also benefits to car financing. For the average car buyer, a car loan opens up more vehicle options. When you are able to borrow money and pay it back within a reasonable period of time, you have the option of purchasing a nicer car. But even if you have savings to pay in cash for a nicer car, financing may be a better decision for other reasons.
Instead of spending cash on cars, it is better to look for other opportunities to witness the growth of money, such as investing in real estate or the stock market.
In addition, instead of spending all of your free cash on buying cars, it is better to have enough savings in emergency situations (such as home repairs).
Buying a car with zero down payment can also use your income to pay other debts, such as high mortgages or credit card debt.
If you decide to seek financing, it is best to choose a monthly payment that fits your budget. If you are not sure how much approval you can get, you can even get pre-approval before you start to see the car. Your Drive can help you get pre-approval and connect you to dozens of $0 down payment options near you. You can apply to us for free in just two minutes!
Benefits of Combining cash & financing
It is important to remember that a car is a depreciated asset. Over time, when you pay off the loan, the car is depreciating. It’s easy to find yourself in a situation where you owe more money to the car than it is worth.
Many car buyers find themselves in this negative equity scenario early on, and if you need to sell your car or get into trouble during this period, this can become a problem. You may need to cover the difference at your own expense.
When buying a car, choosing part of the cash payment and financing the rest is a good way to alleviate this situation. The more advance payment you can provide, the smaller the amount you need to finance, which can help you obtain positive assets faster. You just need to make sure that you don’t give up the opportunity cost of these savings or consume your emergency fund.
