Buying a car seems to be an easy task. You can walk into a dealer showroom, choose the car of your liking, and issue a check to settle the full payment. This means that you don’t have to make any payment on the car anymore. The idea seems reasonable, but it isn't the best option always.
Financing vs. Cash Payment
While buying a car, you can opt for two ways: either finance it by a loan or pay cash. Wondering which one is more suitable? Well, it differs from situation to situation. Let’s understand both the options better here.
If you are planning to finance your car, you get certain advantages than you would get if you pay by cash. For example, your budget for a car is $10,000. You can buy a used car with this budget by paying the full amount in cash. But if you use that money to pay a down payment for a new car, you can broaden your horizon to a great extent. You can easily afford a new model if you have a good credit score.
If there is a drawback in this mode of purchase, then it’s only the monthly payment burden that you have to bear. Just like any other loan, you have to pay an APR (annual percentage rate), which is the rate of interest you pay to your lender. You can, however, lower the interest amount by paying a large down payment as this would mean that you borrow a smaller amount for the purchase.
When is cash payment suitable?
You may find cash payment a lucrative option if you don’t want to bear the burden of making monthly interest payments. But, in reality, it’s not always a good choice. Paying cash for a car purchase proves suitable when the interest on your savings is lower than the cost of borrowing after tax.
No matter what mode of payment you choose for purchasing a car, you should shop around to get the best deal. Create a realistic budget and do a thorough calculation of costs before you make any commitments. Doing so will help you preserve your financial soundness.