Which is better: A car loan or paying cash?

Which is better: A car loan or paying cash?
A common question car buyers ask themselves is whether they should pay in cash or get a car loan. Find out about the pros and cons of financing a car compared to paying cash upfront with loans.com.au
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Car loans vs buying outright

A common question car buyers ask themselves is whether they should pay in cash or get a car loan, with each presenting a few pros and cons.

The reality is that paying cash may not be feasible when buying a car for a variety of reasons, and it could even make less financial sense. Below are some of the benefits and drawbacks of getting a car under finance compared to paying with cash.

Financing a car pros and cons

In this low interest rate environment, there are quite a few pros to financing a car, mostly coming down to ‘opportunity cost’, explained further below.

Pros of car finance

  • Get a safer or more reliable vehicle sooner: Most quality cars these days set you back at least $30,000, with some utes and bigger cars at least $50,000. While you get a lot of car for your money, saving this amount is not feasible for a lot of people.

  • Opportunity cost: This term refers to the money you could spend on a car being used in more useful ways. For example, paying down your home loan could be more useful than paying cash for a car, or investing that cash into shares, or keep it in the bank as an emergency fund.

  • Low interest rates: Interest rates are generally very low these days, making car payments more accessible for a lot of people. This means ‘the cost of money’ is generally much lower than in years prior. What this means is you can potentially get a better car for cheaper, and one that works in your budget.

  • Build up credit history: Having a manageable weekly, fortnightly, or monthly car payment can be a budget-friendly way to build up your credit history and demonstrate to a lender you can pay off debt, which could be useful in securing a home loan later on.

Cons of financing a car

  • Interest paid: Interest paid over the life of the loan ultimately means that you’ll be paying more than the drive-away price for the vehicle in the long run. However, you can reduce your car loan repayments by keeping on top or ahead of your payments, and choosing the shortest loan term that suits your budget.

  • A car loan could limit vehicle choices: Many of the most competitive car loans limit vehicles to new ones, or ones only a few years old. Further, to get the most competitive ‘green car loan’ rates, your car needs to be an electric vehicle or a hybrid.

  • A few things to know: There’s a bit of jargon to familiarise yourself with before. Do you go fixed or variable? Secured or unsecured? What loan term do you choose?

Paying for a car with cash pros and cons

Paying for a car with cash is a big decision, and there are a few pros and cons associated with this method.

Pros of buying a car outright

  • It’s done and dusted: Once you pay cash, that’s it - you don’t have to worry about car repayments, staying on top of your loan, not worrying about things like ‘negative equity’ and so on.

  • Flexibility: Paying cash means it’s yours straight away. This means you can sell it without telling your lender, while also choosing whatever car you want.

  • No interest paid: Paying with cash obviously means there’s no interest paid on the money borrowed as with a car loan. However, interest rates are at record-low these days, making this less of a burden than in the past.

Cons of buying a car with cash

  • Saving takes time: It can be tough saving your hard-earned money only to watch it all go away when you hand the cheque over to the dealership on a new car. Saving the tens of thousands required for a new car could take years - can you wait that long for a car?

  • Cash could be better spent on other things: It’s a big hit to the bank account parting with $30, $40, $50,000 or more straight away. Your cash could be better put to use saving for a deposit on a home loan, in which homes generally appreciate in value, or put towards other investments which could yield more than the interest paid on a car loan - called ‘opportunity cost’ as mentioned earlier.

  • Potential car limitations: It could take forever to save, say, $50,000, and it’s tempting to just get any old car if you’ve saved, say $10,000. But the reality is, a $50,000 car is probably going to be newer, better and much safer than a $10,000 car.

If you’re ready for a new set of wheels, speak with one of our lending specialists today to get started on your car buying journey.

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