Should You Buy a Car with Cash or Get an Auto Loan?

Ryan S. says:

I'm looking into buying a car and have enough cash to pay for it. But someone mentioned that I should get a loan to get a lower price and just pay off the loan right away. They also said this could increase my credit score—is it true?

Thanks for your question, Ryan! Buying a vehicle is a big purchase, and I'm glad you're giving it careful consideration. This post will answer your question by reviewing the upsides of financing and paying cash for a car. Before spending your cash, it's critical to understand how it will affect your finances. 

Before spending your cash, it's critical to understand how it will affect your finances.

Should you pay cash for a car?

It's terrific that Ryan has enough savings to pay for a car. But just because you have money in the bank doesn't mean spending it is the right move. First, let's review three advantages of paying cash for a car.

1. You avoid interest and financing charges

Paying cash means you save money by avoiding years of interest payments on an auto loan. Depending on your loan amount, interest rate, and term, your savings could be thousands of dollars.

2. You might buy a less expensive vehicle

If you only have a certain amount of cash to spend on a car, you'll have to stick to your budget. That can help you avoid overspending or getting talked into financing a higher-priced vehicle than you planned.

3. You avoid getting “upside-down”

The average new car depreciates about 20% within the first year you own it. That loss of value can be a big problem if you take out a loan and end up owing more than a car is worth, which is known as being upside-down. But when you pay cash for a vehicle, you'll always be able to pocket the full market value when you sell it or do a trade-in.

Some lenders won't finance vehicles purchased from private sellers, and those that do may charge higher interest rates.

...

Keep reading on Quick and Dirty Tips