Auto Financing or Pay in Full Advice

The process of buying a car might be complicated, with small and large decisions alike. Decisions range from choosing a reliable model and picking a color you like to deciding how you want to pay. Both new and used cars can represent major financial decisions, and the financing you arrange will further contribute to the total cost of your car.

The Difference

Many car buyers, especially those interested in new models, finance their purchases. Auto dealers work with banks and commercial lenders who offer auto loans that buyers can pay pack over an extended period of time, usually about five years. The lenders charge interest but allow drivers to spread out the cost of a car and make a down payment.

When you pay cash for a new or used car, you forgo paying interest. This may save you money in the long run but also requires ample savings and takes away money you could invest or spend elsewhere while paying off your car if you financed.

Interest Rates

Interest rates have a significant impact on the cost of financing a car. Lenders typically offer their lowest rates to buyers with excellent credit scores. If you have bad credit you can expect not to qualify for the lowest advertised rates. Auto dealers and lenders also work together to offer low interest rates as promotional deals. For example, a dealer may be able to secure a low interest rate for certain models that aren't selling well or for certified pre-owned vehicles that carry an additional warranty.

At the same time, investment interest rates vary over time. If you have a savings account or certificate of deposit, compare its interest rate with the rate you would pay on a new car. If you can earn enough interest from your investment to cover the interest on your car, you're better off leaving your money in the bank and financing the vehicle.

Considerations

Paying cash for a car gives you freedom that you won't have if you finance. For example, the lender might require you to carry more insurance than your state requires. This will cost you more each year in insurance premiums, adding to the total cost of ownership. You'll also need permission from the lender before you sell or trade in your car, which isn't the case if you pay cash and own it outright.

Tips

If you can afford to buy a reliable used car without financing, this is likely your best financial option. Compare loan offers from multiple sources and don't assume that the dealership's preferred lender offers the best rates. If you feel comfortable borrowing from family or friends, ask for a low-interest loan that will save you money on financing and allow you to pay cash to the dealer. Whatever you choose, don't discuss financing or payment information with the dealer until you've negotiated a price. If you reveal the fact that you plan to finance, the dealer may focus on your monthly payment, which is easy to manipulate while obscuring the actual price you'll pay for the car.