Which is better: A car loan or paying cash?
Before purchasing a car, buyers ask the age-old question, ‘Is it better to pay in cash or get a car loan?’ The simple answer is – it depends. Each option offers its own pros and cons; it’s up to you to decide which one suits your situation better.
Before purchasing a car, buyers ask the age-old question, ‘Is it better to pay in cash or get a car loan?’ The simple answer is – it depends. Each option offers its own pros and cons; it’s up to you to decide which one suits your situation better.
Read on to find out the benefits and drawbacks of financing a car purchase compared to paying cash upfront:
What are the benefits of buying a car in cash?
Buying a car in cash is the most straightforward way to purchase a car. You don’t have to apply with a lender or get financing from a dealership. All you need to do is provide the required amount and you can go home with a car on the same day.
However, because cars don’t come cheap, most car buyers can’t simply drop a few thousand dollars and drive off. If you want to buy a car with cash, here are some pros and cons you need to consider:
Pros of buying a car with cash
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It’s a one-time payment. You don’t have to think about car repayments in addition to your other car bills like insurance and maintenance. You can just pay once and not have to worry about things like negative equity and interest rates.
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You can sell your car without a problem. Paying in cash gives you a lot of freedom and flexibility. You can sell your car right away without talking to a lender or thinking about money still owed.
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No interest paid. Because you’re not using a car loan, you won’t have to pay interest on anything. That’s huge savings already as you’ll only be paying for the car’s sale price.
Cons of buying a car with cash
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Saving takes time. It could take a few months or years to save enough for a car depending on your income and bills. If you need a car right away but don’t have enough funds, buying with cash is just not a possibility.
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You’re limiting your cash flow. Buying a car is a big hit to the bank account. Your cash could be better used for a deposit on a home loan or put towards other investments that could yield more than the interest paid on a car loan.
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You could have fewer car options. It could take forever to save, say, $50,000, and it’s tempting to just get any old car if you’ve saved, say $10,000. But the reality is, that a $50,000 car will probably be newer, better and much safer than a $10,000 car.
What are the benefits of buying a car with a loan?
The reality is not everyone has a few thousand dollars to spare on a one-time car purchase. Financing a car makes the most sense for those who don’t have the funds or simply don’t want to dip into so much of their savings.
With good car finance, you may get a few advantages you could miss out on if you buy with cash. Below are some of the benefits and drawbacks of getting a car under finance:
Pros of financing a car
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You can get a car sooner. You don’t have to wait months or years until you’ve saved enough. By getting a car loan, you’ll have the means to buy the vehicle you’ve always wanted.
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Take advantage of ‘opportunity cost’. This term refers to the money you could spend on a car being used in more useful ways. You could have more money to use for a house, paying off existing debt, investments, and so on.
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You have more car options. When you pay for a car in cash, you’re limited to the money you have on hand. With a car loan, you could buy a vehicle that was previously out of your price range.
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You can build up a healthy credit history. Having a manageable weekly, fortnightly, or monthly car payment can be a budget-friendly way to build up your credit history and demonstrate to a lender you can pay off debt, which could be useful in securing a home loan later.
Cons of financing a car
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You have to pay interest. Interest paid over the life of the loan ultimately means that you’ll be paying more than the drive-away price for the vehicle. However, you can reduce your car loan repayments by putting down a deposit, making extra payments, or choosing a shorter loan term.
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The loan process can get tedious. Buying a car with a loan isn’t as quick as purchasing with cash. You need to follow certain procedures so you can settle the purchase.
What should you consider when taking out a car loan?
As you can see, both cash and loan options offer buyers plenty of advantages and disadvantages. Figuring out the right option depends on your finances and what you want out of your car purchase. If you decide to buy a car with a car loan, consider the following:
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Comparison rates – A lender’s comparison rate includes the interest rate plus other fees included in the loan. A car loan with a low comparison rate is ideal. Some lenders may boast a low interest rate but have high comparison rates because they load up on additional fees.
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Loan terms – The loan term will dictate how long you’ll be paying off the car loan. Consider your finances carefully and see what term loan suits your goals best. Use an online car loan calculator to get an estimate of your loan repayments with different loan terms.
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Deposit – You can usually borrow the full sale value of a car without a down payment or deposit. However, putting down a deposit may lower your interest rates and lessen the interest you pay over the life of the loan.
If you’re ready for a new set of wheels, speak with one of our lending specialists today! Call 13 10 90 or apply online.
Find out in under 2 minutes if you qualify for one of our low rate car loans.
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About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
