One of the most important decisions you make while buying a used car is how you are planning to pay for the purchase. The choice comes down to either financing the car or paying in cash. There are benefits and drawbacks to paying in cash you should consider before buying your used car.
Determining Final Cost
Even though a used car will depreciate slower than a brand new car, as the height of its depreciation rate has already passed, it will still lose value over time. Due to the interest applied to a car loan, you may wind up paying more than the car is worth by the time you own its full equity. However, if a dealership offers a good deal on a financing package that you can easily afford, it may make more financial sense not to part with that much cash all at once. Keep this in mind while deciding whether you should pay cash or finance the purchase.
Investments or Savings
Paying for your used car purchase with cash may not be a good idea if you need to remove the cash from investments or savings. Money you have invested or placed in an interest-bearing savings account is making you a profit, no matter how negligible. By liquidating these profitable assets in order to purchase one that depreciates in value, you are losing more money than just the price of the used car. Consider financing the purchase and holding on to your savings and investments.
Credit Rating
A bad or limited credit history can prevent you from getting financing approval, which means your only viable option is paying cash for your used car. Where your credit score stands will let you know how easy it will be to get a car loan or in-house financing with the dealership. In-house financing through a dealership usually has less credit requirements than loans from a bank, and the structured payments will help rebuild a positive credit rating. Take a realistic look at your credit rating, monthly budget for payments, and spendable cash on hand to help you choose between paying cash for or financing your next used car.
The specifics of your financial situation should directly inform how you choose to pay for your next car. While financing the purchase can help your credit and keep you from draining your savings, paying cash can preserve the eventual equity you own in the vehicle.
*Image courtesy of freedigitalphotos.net
