Everyone would love to have enough cash on hand to be able to walk into a dealership and pay cash for a new car or even a newish used vehicle. You walk in with a fist full of money and drive away in a new car that you own outright, free of car payments. A lot of financial planning experts and just regular folks recommend that you save your money until you can afford to pay cash for a car. If you can only manage to save $5000, that’s all you should pay for a car.
Easier said than Done
However, let’s face it, very few of us have the time, the discipline, or the extra money left over at the end of the month to save $20,000 and then plunk it down to buy a car. Life has a habit of getting in the way. Even if you were one of those people in the enviable position of being able to pay cash for a new vehicle, in today’s economic climate, that might not necessarily be your best option.
Deciding how you will pay for your next vehicle is very personal and it’s impossible to say what’s the best option for everyone. However, there are some basic considerations that might help you to decide if you will pay cash or finance your next vehicle purchase.
Finance and Make a Profit
If you don’t have the money to pay cash for a car, it’s a moot point and you have no option but to finance or possibly borrow money from family. If you’re in that position, luckily for you interest rates are very, very low these days. If you have good credit, some car makers are offering 0% financing when you buy a new vehicle and less than 2% when you buy a used vehicle and finance it through the dealership. If you qualify for 0% interest, the dealer is giving you free money to buy a car from them and you don’t have to pay them a cent of interest.
If you decide to take advantage of low interest rates and finance a vehicle, you could invest the money that you would otherwise spend on a car in the stock market and make, on average, 8% on your investment. If you have a mortgage, you could put that money down on your mortgage and save a ton of money on interest over the life of your mortgage. You could be even further ahead if you use the money to pay down a high interest debt like a credit card. You could also just keep the money you would have paid for a car on hand for an emergency fund.
Cash is King – Sometimes
If you opt to pay cash for a car, you’re tying up a liquid asset in a rapidly depreciating asset. When interest rates are high – for example 4.9% or higher, if you have the money on hand, it may make more sense to pay cash for a car and save yourself a lot of money on interest. Over a 5 year loan, if you finance $20,000 at 5% interest, you’ll be paying an extra $2650 in interest charges for your car. That’s $2650 you could use for other things. Another potential advantage of paying cash are the huge discounts and rebates that some dealers offer to customers who don’t take advantage of the low interest rates they offer. You have to do the math and decide what’s best option for you – zero or low interest, or cash back.
Paying cash for a car means that you’re free of monthly car payments which makes it easier for some people to budget. As well, when you pay cash for a car, if you decide to sell it, you never have to worry about coming up with extra money to pay off the lender should you owe more than the car is worth. If you happen to fall on hard financial times, you don’t have to worry about the bank repossessing your car. In fact, if worst comes to worst, you can sell the car and live off of that income for a while or use the money to pay for really important things – like a roof over your head or food.
If you have bad credit, you may find it difficult to get financing for a car purchase. Your only option might be to save your money until you can pay cash for a car. Fortunately, specialist lenders like Auto Loan Kelowna are able to provide car loans at competitive rates to people with less than perfect credit histories.
Do what’s Right for You
There’s no right or wrong way to pay for a car. For some of us, paying cash and taking comfort in the fact that we own our car outright is more important than taking advantage of low finance rates. Other people jump at the chance to use other people’s money to make big purchases so they can keep their own money in the bank or invest it in something that will earn them a little money.
No matter if you want to pay cash or finance your next vehicle, if you live in the Okanagan Valley, visit Kelowna Nissan for a great selection of new and used vehicles, special finance offers, and cash incentives.