Is It Better to Pay Cash or Finance a Used Car?

Posted Wednesday, Nov 23, 2022

Is It Better to Pay Cash or Finance a Used Car?

When you decide to buy a car, you will surely ask yourself if it is better to pay cash or finance a used car. Since each option offers great advantages for different situations and preferences, the right answer for you may not be so straightforward. You may be inclined to pay cash if you've been saving to buy your car and already have the full amount, but the best option for you may not be the most obvious at first glance. You may also be inclined to take out a loan if you desire a more expensive car, but you may want to rethink it before making your final decision. We'll walk you through each payment method so you can decide which one is best for you.

Pay in Cash

Paying in cash comes with many advantages. Sure, it is convenient to pay for your vehicle outright. That way from the first day you drive it, it's completely yours. You don't have to worry about paying month-to-month and you can start making your own decisions regarding your vehicle as soon as you get the keys.

You Don’t Have to Pay Interest

The most obvious advantage is that you won’t have to pay interest. Depending on the interest rate you'd qualify for, the loan term, and the down payment you'd make, you could be saving more than 10% of the total price if you choose to pay for your car in cash rather than finance it. 

 

Let's say that your car costs $33,000, and you make a $6,000 down payment, which means you would need a loan for $27,000. Now, imagine you get an interest rate of 6% with a loan term of 48 months: You would end up paying $3,436.60 in interest, adding to the total price 12% more than the original price.

Stick to Your Budget

Another positive aspect of paying in cash is that since you have already defined the amount of money you will invest in your car, you will have to stick to the budget you have. This will help you avoid getting into debt and acquiring an economic responsibility that is beyond your financial capacity.

Peace of Mind

The main reason many people prefer to pay in cash is for their own peace of mind. You won't have to worry about going through the process of assessing your credit history, evaluating offers from different lenders, doing the math on interest, and so on. Plus knowing that your purchase is yours and that there is no chance of your car being repossessed is always good news.

Finance Your Car

Now, there are several aspects that make financing your car an excellent option. Even in the scenario where you have already saved the total amount of money you want to spend on your car, it can be financially smart to pay for your car with a loan, and we'll tell you why.

Reduce the Impact on Your Wallet 

If you have a good credit history, you have everything in your favor to obtain the most favorable loan conditions. If you’re offered an interest rate of less than 5%, you may as well finance your car. You will be able to make small monthly payments without much impact on your pocket and without increasing too much the total cost of your car when you finish paying it off.

Improve Credit Score

Another advantage of financing your car is that you can further improve your credit score by making your monthly payments on time. This will help you get approved for future credit, receive loans with lower interest rates, and obtain overall better loan terms and conditions.

Increase Your Budget

Financing your car opens up the possibility of exploring more expensive makes and models that you might not be able to afford with a cash payment. This gives you more options to choose from, and the opportunity to acquire the features you've always dreamed of for your vehicle. It is important that you choose a car that is within your financial means, but with a loan, you may be able to stretch your budget a little further since the payment is made gradually and without affecting your bank account all at once. 

 

If you think this is the best option for you and you want to know how the process of buying your car with a pre-approved loan works, you can read our previous article here.

Bottom line

There is no universal answer to which method is best. Your preferences, budget, and credit history all play a role in deciding what's best for you. Ask yourself: Would you run out of cash for emergencies if you paid in cash? How comfortable are you with taking on debt? Do you have investments that have a higher return than the interest on the loan?

 

All these questions will help you clarify what decision you should make in your particular case. It would be better to finance your car if your account would be empty if you paid in cash, as it never hurts to have money available for emergencies. Likewise, it would be financially smart to finance your car if you have an investment return of, say, 7% and your interest rate is 4%. This way you would earn more than you would pay. However, paying cash is an excellent decision if you don't have a good credit history, don't like to acquire debt, or want to make the process faster.

 

At Lux, we have agents who will gladly answer all your questions and help you find the perfect vehicle for you. No doubt you will find the car of your dreams no matter which payment method you choose. Check our inventory and contact us to help you find the model that best fits your desires, budget, and needs.