We’re all diverse in terms of our desires, needs, and financial circumstances. When it comes to buying a car, there are several key elements that appeal to us depending on the type of driving we’ll be performing. Whether you’re driving the family, going to work, or hauling a trailer, this will make you think about what’s most important. Features aside, purchasing a car can be an expensive and exhausting undertaking. Although it’s a question commonly raised, there is no universal answer as to whether you are better off paying cash or taking out a car loan.
The most significant benefit of paying cash for a car, if you can afford it, is not paying interest and ultimately eliminating all repayments. You’ll also save yourself time as there’s no need to go through the application process.
Advantages of paying cash for cars.
It’s relatively simple
Cash is a simple way to pay for your car, and there’s no doubt that at face-value it’s the cheapest. You pay the exact sum agreed, and once you’ve bought your car you don’t have to worry about keeping up with monthly payments over a few years or paying interest on your loan.
Unfortunately, we don’t always have a lump sum available when the time comes to buy a car. Putting off the purchase until you’ve saved the money isn’t always an option and opting for a cheaper vehicle usually means compromising on features that are important to you.
Many of our clients who can afford to buy a car with cash still choose finance. It’s worth weighing up what you could do with a lump sum if you don’t spend it on a vehicle. Beyond simply booking the family holiday, you could put that cash toward a deposit on a home, or into an investment that may give you a higher return than the interest you’d be paying on a car loan.
Greater flexibility
When you pay cash and buy a car outright, the vehicle is immediately yours to use as you like. If you find a better model a few years down the road and wish to sell or trade in your present car, you’ll be able to do so quickly.
It can be cheaper
Borrowing money to buy a car and then repaying the loan over time can wind up costing you more in the long run than if you bought the car for cash. Car loan repayments include not just the cost of the car (which depreciates over time), but also interest and, in most cases, fees.
Before applying for a car loan, add up the total cost of repayments, interest, fees, and other expenses to see if you’re still willing to pay this much for your vehicle.
The advantages of financing a car
Build and improve your credit history
Improve your credit history. A car loan allows you to build and or improve your credit history, provided you make all your repayments on time. Building up or improving upon your credit history and, in turn, your credit score, in turn will help you secure other financing and loan packages (potentially at improved rates) in the future.
Positive events in your credit history (such as paying back a car loan) can also help to undo some of the damage to your credit rating caused by past negative events (such as loan defaults). Over time, a carefully managed car loan could potentially contribute to repairing a bad credit rating.
Money at hand
Because cars are expensive, you may need to put the lion’s share of the money in your savings account towards paying for one upfront. And to state the obvious, once you’ve spent this money, it’s gone. This could potentially leave you in a tricky situation if you run into unexpected expenses such as surprise medical bills, and don’t have enough funds available to cover these costs.
Expanded choice of vehicles
A car loan can let you acquire a more appropriate vehicle than you’d be able to afford otherwise, as long as you can easily handle the repayments. This may enable you to purchase a vehicle that is more suited to your needs, has a reputation for dependable performance, or has a few luxury items that will enhance your diving pleasure.
Money for a rainy day
Rather than saving up a large sum, then emptying your bank account to buy a car, leaving you at risk of financial hardship, a car loan can let you stretch out your car payments over several years. With some careful budgeting, it’s usually possible to cover your car loan’s monthly repayments while keeping enough in reserve to cover everyday costs and emergency expenses.
Can be more expensive overall
Borrowing money to buy a car and then repaying the loan over time can wind up costing you more in the long run than if you bought the vehicle for cash. Car loan repayments include not just the cost of the car (which depreciates over time), but also interest and, in some cases, fees.
Before applying for a car loan, add up the total cost of repayments, interest, fees, and other expenses to see if you’re still willing to pay this much for your vehicle.
Saving takes time
Unless you fortuitously come into money, building up enough cash to buy a car outright is going to take some time and dedication. Even with the help of a dedicated savings account that can grow our wealth by earning interest, you may be waiting a while before you can roll away in your new car. And the longer it takes to save, the greater the risk of financial emergency popping up when you least expect it, which could put you back at square one again.
Loan risk
Many car loans use your vehicle as security, meaning if you fail to make your repayments and default on your loan, the lender can repossess and sell your car to make up for their losses.
Defaulting on your car loan repayments often means you’re already struggling with financial hardship but losing your car as well can make an already tough situation worse. As you may need a car for work, limiting your ability to get out of financial hardship, or you may struggle to meet your family commitments without the flexibility of your own vehicle.
Other considerations
Insurance
If you do proceed with cash, make sure you have paid for your insurance cover and that you take legal possession of the car when you hand over the money, particularly if you are dealing with a private seller.
Safety
If you find yourself compromising on the safety, performance, or suitability of the car just so you can pay with cash, then financing may be the wiser choice.
Tax deductions
If you are buying a motor vehicle for business purposes, then talk to your accountant or tax adviser because you will usually enjoy tax and cash flow benefits by using a loan instead. You may be able to claim repayments as a tax deduction, you may also be able to deduct everything from the interest you’re paying to servicing, insurance, repairs and more (as each business is different, be sure to check with your accountant to confirm.
What about repayments
Today’s low interest rates have also helped to sway the balance in favour of financing. Car finance is more affordable than ever before. With a loan, you can buy the car now and choose a loan period to ensure your repayments are comfortable.
If you haven’t bought a home yet
For those considering buying a home in the future, using your savings to fund a larger deposit on your home instead of your car could also save you on lender’s mortgage insurance.
Conclusion
Once you’ve considered everything we’ve discussed here, if you still think cash is best for you, go ahead. You won’t have any repayments and you’ll pay no interest.
If you’ve decided finance is best, you will need to work out the finance option that provides you with the most benefits.
The Federal Government’s car loan advice says that it’s important to look at loans before you go to a dealership. It says choosing the right loan can save you thousands of dollars in wasted fees and interest payments.
DISCLAIMER: The information contained in this document is general in nature and should not be relied upon as legal advice. Berra Finance does not warrant the accuracy or completeness of any representations made in the document or that the material is suitable for any purpose. You are responsible for assessing the material and seeking your own legal or financial advice. To the fullest extent permitted by law, Berra Finance excludes all liability for loss or damage (including indirect or consequential loss or damage) which may be incurred in connection with your use of or reliance on the material contained in this document.
