Get a car loan or pay cash? That’s a question that many people ask themselves when they’re looking to buy a car. There are many financial experts out there who advocate paying cash for everything and staying out of debt entirely, and there are many more that advocate smart use of credit. Because everyone’s financial circumstances differ, a black-and-white answer is hard to come by.
But, since we’re Carloan.com and we specialize in helping people get car loans, even with bad credit and no credit, we’re going to take the side of smart credit use. Here are the top 5 reasons not to pay cash for your next car:
1. It’s All the Cash You Have
If you absolutely need a new car rather than just really wanting one, and paying cash would deplete all of your savings, the smart financial move is probably to finance at least part of the purchase. Why? Because another smart financial move is to have enough money in savings to cover your living expenses in case of emergencies. If you lose your job but all your money is tied up in your car, you’re not in a good place.
If you get hurt and can’t work, you’re in a similar place. However, many car loans have optional insurance against exactly that, meaning your payments get made until you can get back to work.
If you really just want a car, but you want to pay cash, you’re better of waiting until you have enough for the car and your emergency fund.
2. You Have Other Debts
Interest rates are generally pretty good right now, whether you’re looking for a used car loan or a new car loan. If you have bad credit or no credit, sure, rates are going to be higher. What you have to look at, though, is how those rates compare to other debt you have.
For instance, if you have credit card balances that are carrying higher interest rates than you can get for a car loan, the smarter play is usually to pay off those higher-interest debts first. That saves you money in the long run.
3. You Need to Build Credit
Okay, so you have plenty in savings and you’re otherwise debt free. Another good reason to finance is if you don’t have especially good credit, or if you don’t have a lot of credit history, but you are looking toward a future situation when you’ll need good credit. Buying a house is a good example. Assuming you won’t be paying all cash for your house, your credit score will be very important.
Your credit score is calculated using all kinds of indicators, but a couple of the important ones are the variety of credit types you have and your history of on-time payments. If the only type of credit you have is through credit cards, for example, your credit score isn’t going to be as good as it could be. A car loan gives you another type of credit on your report, and assuming you’ll be making your payments on time, you can kill two birds with one stone.
4. You Won’t Save Money Paying Cash
Time to put an old myth to rest: You won’t be able to haggle at the dealership for a lower price on your car by offering to pay cash. Once upon a time this might have been true but the fact is, dealerships often get manufacturer or other incentives to finance cars. It’s entirely possible that you will find some dealerships less willing to offer you a break if you announce in advance that you’re bringing cash to the table. Believe it or not, the profit margins – especially on new cars – can be pretty thin, so dealerships have to find other ways to make sure they can keep the doors open.
5. You Can Invest Your Money for a Better Return
This is a tricky one because it involves risk. If you can get a car loan at 6%, for instance, but you have an investment opportunity with a 10% return, the simple math says that you’ll earn 4% on your money if you put it into the investment instead of using it all on a car purchase.
While the first variable – your car loan interest rate – shouldn’t be too hard to get, it’s the second variable – the return rate on your investment – is often a lot harder to estimate.
A savings account won’t pay you enough to make it worthwhile. Neither will a certificate of deposit (CD). In fact, there aren’t many investments that will give you a guaranteed 10% or higher return on your money, so you will always be assuming some amount of risk. And that amount of risk grows as the return you need gets higher. Still, if you’re good at assessing risk, this kind of thing presents an opportunity for you to make money while using someone else’s money to buy your car.