The basic math of financing your vehicle purchase versus buying the vehicle outright isn’t as simple as looking at the cash price and adding on the interest payments that come with financing. Saving up and paying in cash can be a good option for some, but financing is frequently an easier choice that leads to a better long-term financial outcome.
Financing your vehicle means taking out a loan and making monthly payments over a period of time to cover the cost of your purchase. But it’s not just for people who don’t have the cash to pay up front. Financing means better financial flexibility in the near future and it can also be a boon for later financial decisions.
The current market makes financing an especially attractive option. With interest rates commonly sitting at a very affordable level, financing your vehicle allows your bank account the flexibility that you would sacrifice by making a large cash payment without much increase to your long-term expenses.
In some cases, making a lump-sum payment can be ideal. However, making that choice has to do with more than just avoiding monthly payments. It also means a huge hit to your savings and far less financial flexibility in the near future. You should always avoid clearing out your savings account, unless it’s an absolute emergency. The top financial minds in our country all say this.
There is also more at play than the cash in your coffers. A major factor in receiving favorable rates on future home and vehicle loan rates is your credit score, and financing a vehicle can be an easy way to raise that score—especially in a market that is currently offering interest rates between zero and five percent. By financing your vehicle and securing a low interest rate, you are setting yourself up for major savings on interest payment for future purchases. Lenders love a healthy credit history. So making car payments on time – every time is like adding a gold star to your credit history and overall rating.
The Cash Question
Even if you have the cash on hand, opting for monthly payments and paying them off early can be a smart long-term move. Consider two scenarios. In one, you pay up front to avoid monthly payments and added insurance obligations. Your payments are finished, and you have nothing else to think about, but you may be missing out on an opportunity. In scenario two, you decide to finance your vehicle purchase. You secure a reasonable interest and, after making an initial down payment, put some of your leftover money in a low-risk investment. The returns may not be stunning, but they will help to negate your car loan interest payments. Then you make regular payments above the minimum amount, thereby raising your credit score. In the end, you’ve paid very little more than you would have by making a lump-sum payment, and you’ve improved your credit score, giving you better financial options in the future as we previously mentioned.
Buying your car outright may be a smart option for some people who can truly afford it, but the fact is that not everyone can. It’s important to keep in mind, however, that financing your vehicle purchase doesn’t mean spending a lot more in the long-term and it doesn’t have to mean that you’re making a purchase you can’t afford. Being smart with your money means that you can finance your car without very much risk and also set yourself up for an easier ride the next time you decide to make a big purchase.
If you would like to learn more about your financing option, you can contact one of Autodome’s financial experts! We are here to help you now and in the future as well.
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