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Should I Finance a Car or Pay Cash in 2018

There are reasons for and against financing a car or paying cash. It can seem like a smart idea to buy a car you can afford to pay cash for. It might also seem like a good idea to bolster your credit by purchasing with financing and paying it off quickly with cash in hand. The good news is: both are smart. The other news? Those aren't the only reasons to choose financing or paying cash.   

The Difference Between Cash and Financing

The major difference between buying with cash and financing a car is in the interest to be paid. Cash payments have no interest added on, obviously, but are limited to the amount of cash on hand. With financing, a monthly payment is made and that includes some interest, which is the profit the financing company makes for loaning the money.    The downside to paying cash is that the limit is where the cash ends. A buyer with $10,000 to spend may only be able to afford an $8,000 or $8,500 car because taxes, registration, and other costs will come over and above the purchase price. That same $10,000 applied to a finance deal as a down payment could mean the purchase of a $20,000 car that is far better than the $8,500 car and with a very low amount of interest because of the large cash payment. Financially, that second scenario can be a win-win.     Flipping that, if the vehicle is the right one and the price is right, then cash is usually preferable. No dealership or seller will balk at the idea of a buyer handing over cash money or writing a verifiable check for a vehicle purchase.    

Understanding Interest Rates

The other question about whether you should be financing a car or pay cash this year is with the interest to be paid. On a loan such as the one outlined above, the interest rate is likely to be very low. A person with a great credit score and plenty of cash to spend is in a far better position than is a person with little money to spend and the same great credit. But there is more at play.    Financially, having money in the bank (savings, invested, etc) is preferable to having money spent. If inflation is at two percent and savings accounts pay out three percent, you'll profit by one percent on your basic savings investment. Other types of investments can boost that much higher. A simple investment that makes about five percent may be equal to or better than the interest being paid on a good vehicle loan.    As an example, a buyer with good credit has $20,000 in the bank as cash on hand. That buyer sees a vehicle they'd like to purchase and makes a deal to purchase for $18,000. Financing the vehicle yields a 2% interest rate loan with a $5,000 down payment and a total interest cost of about $300 plus $100 in fees. Obviously we're using nice round numbers to keep the math simple. Investing the other $15,000 in a long-term savings lock like a certificate of deposit or similar would yield 3% interest, compounding annually. That savings interest totals nearly $1,400 in profit. Clearly paying cash for the car is not the better deal.   

Building Credit

In another instance, a buyer may have cash in hand and be ready to purchase a car, but have little or no credit. Or even bad credit. Using the cash in hand as collateral at a bank, the buyer could facilitate a loan for the vehicle's purchase and pay it over time using the savings in hand. This would cost the buyer money in interest terms, but would go a long way towards building or rebuilding credit.    

Clearly, there are many reasons to consider financing over paying cash for a vehicle purchase. Making the decision on financing a car or pay cash is not always straightforward. Here at Faraz Auto Sales, we can help you decide your best option for a vehicle purchase.  
Categories: Finance