Should I Finance a Car or Pay Cash? Perhaps you’ve wrestled with this question numerous times while saving up to buy a car. Some people fear auto loans because they don’t understand how interest rates and credit scores work. On the other hand, some car buyers feel that cash purchases only favor people earning hundreds of thousands of dollars every month.
In order to determine the best car purchasing option that matches your financial health, you need to look before you leap. Are you wondering whether should I pay cash or finance a car? These questions below will offer you clarity.
1. When should I pay cash for a car?
1. When you have a high disposable income
Disposable income is the amount of money you save after deducting taxes and monthly expenses from your gross income. If you earn $8,0000 per month as gross pay and your taxes plus monthly expenses amount to $3,000, then your disposable income is $3,000.
If your disposable income is $3,000, then you don’t need an auto loan in order to afford a brand new car. Saving $1,500 for 12 months amounts to $18,000. This is enough to get you a brand new environmentally-friendly Kia or Hyundai sedan. Extending your savings project by another year enables you to have enough money to buy a brand new BMW 3 series.
2. When buying a really affordable used car
Let’s assume you work in Miami, Florida. One day, your good friend informs you that they’ve received a transfer letter to Maine. He also tells you that he wants to sell his car before relocating to Maine. Since you’re good friends, your friend wants to sell you his Toyota for $8,000. You bargain and your friend lowers his price to $6,500.
You can save $6,500 within a short time if you have a minimum disposable income of $2,000. Taking an auto loan for such a small amount is a bad decision because there’s a high possibility of servicing an upside down loan.
3. When you can’t afford the interest rates in your federal state
It’s no secret that some federal states in America have more costly interest rates than others. For instance, Arizona has an interest rate of 10% while Indiana residents pay 21% for loans amounting to $50,000 and above. In Georgia, you only pay a 5% interest rate for loans above $3,000.
If you’ve just relocated to a state that has really expensive interest rates, just create a savings plan. You’ll avoid paying high-interest charges and risking your credit score.
4. When you want to install car accessories right away
Did you know that you cannot install car accessories in an auto loan car? In fact, you cannot even modify the paint until you receive the car title from your creditor.
If you’re planning to install window tints, expensive rims, and get a new paint job, it’s better to pay cash for your car. A cash purchase grants you full ownership rights on the spot. This is the freedom you need to express your individual style.
5. When you’re planning to relocate to a different federal state soon
One disadvantage of auto loans is that some creditors require you to maintain your residency until you complete all monthly payments. Obviously, to minimize the risk of defaulting and facilitate car repossession.
Are you planning to relocate to a different state? Making a cash purchase safeguards your freedom of movement because you gain full motor vehicle ownership immediately. Another benefit is that you can sell your car then buy a better one after settling down.
2. When is it okay to apply for car financing?
1. You have moderate disposable income
Are you currently paying more than one long-term debt simultaneously? If you’re planning to get a car soon, consider applying for an auto loan. Despite the fact that you need a car for convenient traveling, you need to take care of your mortgage first.
Auto loans are ideal because you only need to save for a down payment and loan application charges. You can achieve this goal within six months because creditors usually want 20-30 % of the car’s price.
2. When you have an excellent credit score
One way of getting a really affordable auto loan is having an excellent credit score. Car buyers with credit scores above 720 pay 4-6% interest rates. Bad credit auto loan buyers pay interest rates above 12%. That’s a huge difference, isn’t it?
Owning a good credit score enables you to purchase the latest cars through auto loans. You get to drive your dream car to work and your favorite hangouts after putting down a 20-30 % down payment. Plus, you don’t need a cosigner in order to secure your car financing.
3. To improve your credit score
If you currently have a bad credit rating, applying for secured loans will improve your situation significantly. Applying for a bad credit auto loan increases the types of credit available in your credit report. This constitutes 10% of your total credit score.
Paying your debts on time enables you to maximize on payment history points. It actually constitutes 35% of your credit rating. If you pay all your auto loan installments on time, you’ll notice a big improvement in your credit score.
4. When your employer offers really affordable staff car loans
Permanent employees working in large organizations enjoy certain perks in addition to hefty monthly salaries. For instance, auto loans offered at greatly discounted interest rates compared to mainstream commercial banks and credit unions. The other advantage of staff car loans is that you don’t need a huge down payment since your employer makes automatic deductions from your paycheck.
What’s better, Car loan or cash payment?
We’ve seen that your credit score, level of disposable income, and price influence car purchasing decisions. Smart car buyers choose purchase options that leave enough disposable income to save for future projects like end-of-year family vacations. After buying a car whether by paying cash or applying for an auto loan, the government expects you to have a valid insurance cover.