Financing a car purchase can allow you to pay a relatively small monthly payment that fits into your budget, while helping to build your credit. Nevertheless, if you have the financial resources, there are several good reasons why you should pay cash for your next car. Before you head out car shopping, understand your financial options and use the one that is best for your situation.
No Payments
The most immediate, and obvious, advantage to paying for a car in cash is that you will not have to carry hundreds of dollars a month in a regular payment. You will save money on your personal budget, and you will free up money that you can save for future needs.
Interest
When you finance a vehicle, the lender charges interest on the loan. Consequently, at the end of the loan the total amount you paid is more than the actual sticker price you agreed to with the dealership. When you pay in cash, you don't pay interest on a financed amount, which translates to a savings of hundreds, or possibly thousands, of dollars.
Upside Down
According to John Rosevear, writing on the Motley Fool website, a car loan becomes "upside down" when the value of the loan exceeds the value of the vehicle. You are still making monthly payments, but it can be almost impossible to refinance an upside down car loan to try and lower your monthly burden. When you pay in cash, you do not have to worry about the value of the vehicle versus the amount left on financing.
Reselling
If you finance your vehicle purchase with a five-year loan, then you are tied to that loan until it is paid off. If you would like to sell your vehicle three years after purchase, you must first satisfy the lien holder, which is the institution that financed the vehicle. When you pay in cash, you get the title to the vehicle with no lien holder on it and you are free to sell the vehicle whenever you want for as much as you want.
Repossession
Defaulting on a car loan is something that can happen to anyone. When you first obtained the loan, your financial situation may have been stable. But, if you lose your job or get hit with unexpected medical bills, then your financial situation could change. When you pay in cash, you own your vehicle outright and you do not have to fear defaulting on the loan or losing your vehicle to repossession.
Fees
Leasing or financing a vehicle involves a schedule of fees. In some cases, those fees are attributed to the lease or the loan and have little to do with the value of the vehicle. For example, if the finance company insists that you have insurance placed on your auto loan because of your bad credit, then that insurance cost increases the amount of the loan without adding to the value of the vehicle. When you pay in cash, you do not pay lease or finance fees and only pay for the price of the vehicle plus administrative costs such as registration and title.
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