Now that you have found a car you like, the question is should you pay for it with cash or through finance?
Buying a new car is a huge decision no matter the price and while both payment options have their quirks and perks, it ultimately comes down to what you can afford, and what else you might do with that money.
Read ahead to work out if buying your car outright or paying off by installments is the right option for you, and consult with a financial advisor for further advice.
Paying in Cash
If you are one of the lucky ones and have the funds ready to go, the best thing about paying in cash is that you don’t need to go through the detailed process of borrowing the money and the ongoing process of paying it back with interest.
However, paying by cash takes out a big lump sum payment from your bank account, which may not be ideal if you like to have money tucked away for an emergency. If replacing your old car with a new one wasn’t in your plan, then using your savings could mean the holiday or house renovation may have to wait.
Another way to decide whether to pay cash or finance is to ask yourself, "Is the interest rate on financing comparable with the rate I could earn by investing?" When you can borrow money at a lower interest rate than you can earn on money you invest, it can be cheaper to take a loan rather than pay cash.
Benefits of Paying in Cash
- No extra money added to the price of the car through interest payments or application fees.
- A simple and straightforward process with a one off payment, so you can start saving towards another car.
- You won’t end up being upside down on your loan and owing more money to the lender than what your car is worth.
- Having the cash set aside gives you a rough budget in mind to stick to encouraging you to not overspend.
- You own the car outright and you can sell it at any time if your situation changes.
Paying with Finance
Even if you have the funds to purchase a car outright, it can be worth looking at whether it is better to pay it off with finance. If there’s a safer and newer car that’s caught your eye but is out of your price range, finance can help you to afford it and spread out the payments over an extended period of time.
Financing can help you to build up your credit score. By taking out a loan and making regular payments on time, you develop a positive credit history which can come in handy when you are applying for other loans such as a mortgage.
The perfect time to finance your car is when interest rates are low, freeing up your money for other investments elsewhere. Part of deciding which payment option is the best is to figure out which most benefits your bottom line. In the end, investing and going into debt are both risks and you're the only one who can decide whether to finance or pay cash.
Benefits of Financing Your Car
- Increases the budget and widens the choice of vehicle so you can choose the most reliable and safest car you can afford.
- You don’t have to wait to save up for the car and can instead drive off with it today.
- It won’t completely drain your savings which you may need for emergency situations.
- Over time you will develop a positive lending and credit score.
- No opportunity costs as car value depreciates over time.
- Ability to invest your cash for a better return.
What are my Finance Options?
Here are the financing options you can choose from:
- A loan from a 3rd party finance company such as Suzuki Finance through the dealership
- Heading straight to the bank
- Adding the cost of your car onto your mortgage
- Taking out a personal loan
You’ll need to budget your income and expenses, and map out a weekly, fortnightly or monthly repayment plan to pay off your loan. While paying by cash doesn’t accrue interest, finance will, and you’ll end up paying more than the actual price of the car.
With paying by finance, you’re essentially borrowing money from someone else - so the lender has security over the vehicle. If you put the car up for sale, the proceeds will immediately go to the lender to pay off the loan before any leftover funds come to you. You can say goodbye to your car if you fail to make your repayments, as the lender can take it away as a form of payment.
Before signing on any dotted lines of a loan agreement, it’s in your best interest to seek out independent financial advice.
Here are the different types of loan agreements:
- Credit Sale Agreement – You pay your car off with regular installments based on a fixed interest rate and once the last payment is made, ownership is transferred to you. The loan term can be between 6 months and 5 years and you have the flexibility to build in on-road costs, insurance and servicing into the loan.
- Assured Future Value Agreement - a flexible contract with low interest rates, fixed repayments and 3 options to choose from at the end of the agreed term – return the vehicle with no further payments (provided km and fair wear and tear conditions are met), renew the contract and change your old car for a new one, or retain the current vehicle and pay or refinance the outstanding balance.
- Finance Lease Agreement - pay a regular lease amount based on the total cost, less an agreed value for the car at the end of the term (the assumed residual value), plus interest and documentation fees. Service costs can also be incorporated into the lease. At the end of the term, you can purchase or refinance the vehicle at the agreed value.
Buying a car, either with cash or a loan, is a major decision. On one side, going into debt shouldn’t cause you financial stress. You should be able to comfortably afford your car payments. On the other side, a major cash purchase shouldn’t cause unnecessary risk. You should still have enough savings left for emergencies when handing over all that money. Either way, you should always try to buy the most reliable car you can afford. If you’re on the market for a new car, download our Complete Guide to Buying a New Car today!
