Financing vs. Paying Cash When Buying a Car: What's Better and Why?
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Your car plays a significant role in your day-to-day life. It not only provides necessary transportation for performing essential tasks, but it also gives you miles of fun and enjoyment on the open road.
But when it comes time to purchase a new-to-you car, is it better to pay cash or finance a car?
While financing can make buying a vehicle more manageable, paying in cash could net you a better deal and mean no monthly payments year after year.
Comparing financing with buying a car involves many considerations and depends on your financial situation and which appeals more to you.
Let's look at the details of financing versus buying a car.
How to finance a car
Financing your vehicle purchase allows you to pay in a small series of steps rather than one big chunk. Similar to climbing a mountain in a patient and deliberate manner, an auto loan makes your large purchase more manageable, allowing you to keep extra money in your savings account.
Many financing options comprise car loans, like the down payment, interest rate, APR, and term length. Each element plays a role in determining your monthly payment amount and your total cost over the loan term.
The higher the down payment you make when financing, the less of a sum you borrow, which lowers your monthly payments overall.
The interest rate is a financing charge levied by a lender against the total amount borrowed, also known as the loan principal. This percentage is added to your monthly payment and ranges from zero to 20 percent. Typically, those with a good credit history pay lower interest rates, with the opposite being true for those with poor credit ratings.
The length of a car loan usually varies from 24 to 84 months. Longer-term loans offer the benefit of lower monthly payments, which can help you buy a more expensive make and model with more features and options.
Annual percentage rate, or APR, considers both the loan's interest rate and additional charges from a lender. Since APR is a more comprehensive figure, it gives you a clearer idea of what you'll pay on an annual basis compared to the interest rate alone.
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How to buy a car with cash
In contrast to financing, paying cash for your next car may seem like a simple process. However, several details apply to ensure the transaction goes smoothly.
Before you pay for a car upfront, you'll have to decide on the price of the car you can afford and save enough cash. During this time, you can research different makes and models, decide on the one that's right for you, and set a budget for your purchase.
Buyers typically make cash vehicle purchases with a cashier's check. Once you and the seller agree on a purchase price, you can obtain a cashier's check from your bank or credit union.
Another method of cash payment is via direct ACH transfer from your bank.
And though electronic payment might sometimes be an option, most dealers won't accept this method.
Though buying a new-to-you car can be fun, negotiating is a hassle. The stressful process of going back and forth with a salesperson can take hours before you reach an agreement. But Shift's no-pressure environment takes the stress out of car buying. Shift's website has a large selection of fully inspected cars located across the country that are ready to go. The website is user-friendly, and you'll be able to find various makes and models to suit your needs and budget. Any car you buy from Shift has a seven-day refund policy for extra reassurance. In case you aren't fully satisfied with your purchase, you're able to return it with no questions asked. Shift also works with a network of trusted lenders, making it a one-stop-shop for finding just the car you're looking for. And Shift welcomes co-signers for buyers with low credit ratings, too.
Should I finance a car?
Financing your vehicle purchase offers you the benefit of paying gradually over time so that you can keep extra savings around for other essential expenses.
If you secure a low-interest rate on your auto loan, financing can make more sense than paying in cash. After all, if you pay barely any interest, wouldn't it be easier to make your purchase with small payments rather than all at once?
You can also build up your credit score when you routinely and reliably make your loan payments month after month.
And if the vehicle you want is a little more expensive than you'd budgeted for, a longer-term loan can make your payments more manageable over the long haul.
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Should I pay cash for a car?
Paying cash upfront for your car purchase brings its own set of benefits.
When you pay cash for a vehicle, you don't have to worry about making car payments month after month, year after year. You could also secure a better deal from particular sellers as a cash buyer.
Paying cash also means you won't pay any interest on your purchase or need to apply and qualify for financing.
And when you have a specific amount of money to spend in cash, it helps you stick to a budget and not pay more than you can afford.
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Financing vs. buying a car in summary
When making a vehicle purchase, financing and paying in cash both offer unique benefits.
Paying with cash upfront means you don't have to make monthly payments over some time or be responsible for additional interest.
But financing lets you break your expense into more manageable pieces, easing the strain on your bank account and helping you afford the car you want.
When deciding to pay cash or finance a car, it depends on your financial situation and individual preference. Both options have their pluses and minuses, and by weighing them against each other, you can pick which one suits you better.
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April 15, 2022
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