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Should You Finance or Pay Cash for a New Car?

FinancingWhen you decide to purchase a car, you have several choices as to how you want to pay for it. Financing involves borrowing money from a lending institution, at a pre-agreed rate of interest, and then repaying that money over time. If you pay cash for the car, the dealership receives the purchase amount directly from you in one upfront payment. Deciding whether to finance or to pay cash is potentially complicated, and you should consider the pros and the cons of both.

Benefits of Financing
When you finance a vehicle, your savings account remains untouched, except for whatever amount you use as a down payment toward the financing. That leaves your savings account ready in case of emergencies that might arise. Financing also allows you to build your credit rating, according to Wall St. Cheat Sheet. The bank reports all activity to the credit bureaus, so making your payments on time is essential. With existing good credit, you may also qualify for loans that have extremely low or no interest rates.

Drawbacks of Financing
On the other hand, if you are “upside down” on your car loan, meaning that you owe the lender more than your car is worth, you may not be offered anything for trade-in if you decide to sell the car early. You also do not own the car until after the last payment is processed on the loan. If you have poor credit, your interest rates and finance charges may be high enough to add thousands of dollars to the final financed amount, making the car grossly overpriced.

Benefits of Paying Cash
With a full cash payment for your vehicle, you own the car immediately and outright. You completely avoid any finance charges or interest charges, and it can be easy to sell the vehicle more quickly because you do not have to wait for the bank or the finance company to send or to release the title. If you want an even easier experience selling your car, you can also contact a company such as to sell the car without having to prepare it much for sale.

Drawbacks of Paying Cash
If you pay cash outright for your car, your money is gone immediately. It is no longer in your account or available for any sort of emergency. The car also depreciates the instant you purchase it. The car is no longer worth what you paid for it, so you will not get the value you want from the vehicle if you sell it soon after purchasing it. If you look at your car as a short-term investment, you would lose money on the purchase.

Ultimately, you must weigh the benefits and the drawbacks of financing and a cash payment for yourself. If you have the money to spare and your credit rating is not an issue, you may want to go with a cash payment. On the other hand, if you need to build your credit rating or you tend to sell your car often, financing may work best for you.


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