The decision to use either cash or credit to purchase a car should be settled before you are sitting in a dealership preparing to finalize the deal. Dealerships, especially those who specialize in working with credit-troubled buyers, are equipped to work with nearly every financial situation. To know which choice is appropriate for you, look to the benefits and drawbacks of each.
Cash Benefits
The most obvious benefit to paying cash for your car is that you won’t need to absorb the cost of interest along with the cost of the car itself. A cash transaction is a one-time expense; there are no monthly car payments that need to be worked into your budget. Once you hand over the money you own your car, and the equity it represents, out right. You can sell the car, drive it for the next ten years, or do anything else you might want with the vehicle since you won’t be beholden to a credit or financing company.
Cash Drawbacks
Unless you have $30,000 of available funds to drop on a car purchase, deciding to buy a vehicle in cash presents some immediate and potential drawbacks. First, you will mostly likely be limited to older used cars that have asking prices within a reasonable cash-friendly range. New cars, and even late model used cars, are often more expensive than the average person can afford to spend in cash up front. Additionally, you will be draining a serious amount of money from your savings, leaving little available cash to serve as a safety net in case of an unexpected bill or emergency. You need to be extremely comfortable spending that lump sum all at once before purchasing a car with cash.
Credit Benefits
Using credit, such as an in-house dealership loan, to buy a car is much more common than the cash alternative. The most notable benefit to choosing the credit option is that the cost of your new car is broken up into smaller, more manageable, payments over time. Financing payments are not only easier on your bank balance, they also help create positive credit activity as you repay the loan.
Credit Drawbacks
Interest is the number one drawback to using credit to purchase a car. Depending on your credit score and the financing terms for which you qualify, you can wind up paying nearly as much in interest as you did for the car itself. Longer loan terms may come with lower monthly payments, but you will increase the inevitable cost of the car with all of the interest paid over time. Should any unforeseen financial hardship rear its head over the course of your loan, you can lose your car and incur a big hit to your credit rating.
Given the availability of options, it really does come down to which of the financing strategies seems best to you as the buyer. Understand the benefits and drawbacks of both credit and cash car purchases while deciding which is best suited to your financing needs.
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