Purchasing a vehicle is one of the largest and most important financial transactions you will make in your lifetime. It can also be one of the most complicated, with a variety of options to consider and many choices to make, such as whether to buy new or used.
One of the most significant of these choices is whether to finance a vehicle or pay for it outright with cash. Both of these options have their advantages and drawbacks, but it is important to understand exactly what they encompass.
Paying with cash
Paying for a vehicle with cash is exactly what it sounds like. If you have the cash at the ready, you can purchase a vehicle in a single transaction.
On the other hand, financing involves making payments over the course of an extended period of time. More often than not, payments for the vehicle are made monthly.
According to Jeff Youngs of J.D. Power, you usually have the option of financing through a dealer, which eliminates the middle man, or taking out an outside loan through a bank or a credit union. Work with your financial institution to come up with a loan that works for you.
Advantages of paying with cash
Most financial experts agree that paying with cash is the safest option in most financial transactions. Doug DeMuro of Autotrader explains that paying with cash means you won’t have to pay interest like you would if you relied on financing.
John M. Vincent of U.S. News says that you might find yourself saddled with additional loan fees if you go the financing route. It can often take years to completely finance a vehicle, whereas paying the full amount with cash will complete the transaction in one fell swoop.
Disadvantages of paying with cash
Of course, most people do not have large amounts of cash lying around to use on an expensive vehicle purchase. Vincent advises that you shouldn’t pay in full with cash if it will deplete your emergency fund.
In that same vein, using a large amount of cash in one transaction to purchase a vehicle will mean less money to spend on additional projects or products. Tom McParland of Jalopnik adds that negotiating a is easier if you choose to finance rather than purchase the vehicle with cash.
The best of both worlds
There is another option for customers who have the cash to pay for a vehicle, but don’t want to use it all at once or be stuck paying for a vehicle throughout an extended period of time: make a large down payment. A down payment is an amount of money you pay upfront during the financing process for a new car. According to U.S. News’ Vincent, the larger the down payment, the smaller the monthly payments will be for the car.
When it comes to paying for a new car, paying with cash and financing each have their benefits and disadvantages. Choosing one or the other, or a balance between the two, requires a good deal of examination of your finances, but is important to helping you obtain a new vehicle to call your own.