The choice of whether to buy a car outright or to go for car financing is sadly not a choice that many people have the luxury of making. I say “sadly” because trying to make a decision whether to make an outright purchase or opt for financing means that the individual in question has the cash to make an outright payment if they so choose. Most of us don’t have this choice hence the “sadly.”
If not that many people can afford outright purchases, why then is it worth the effort and bother trying to compare between the two? It is important for two reasons:
1. With more information made available, the few who have the cash to make outright payments can decide if it’s really a smart financial move with all the right information.
2. Those who do not have the luxury of choice can have a better understanding of the financial wisdom of taking advantage of financing. With this knowledge, they can exploit these advantages more and end up (hopefully) with a better deal.
The cash purchase
I know personally it is a sign of affluence to pay cash for your car and we all enjoy feeling important. Is it however a smart financial move for everyone? What does a person gain when they pay cash for their car?
1. No burden of continued monthly payments.
2. Immediate full ownership with no fears of repossession.
3. Bragging rights with friends and family.
4. Nothing more…
Are the above enough reasons to make outright payments? The answer to this would be obvious after we have considered the flip side.
The finance option
What does a person gain when they go for auto financing rather than outright purchase?
1. Payment spread over time.
2. Extra funds freed up for investment.
3. Access to better and more expensive cars since payments are made in installments and over time.
And now the math of it all
Merely glancing through the gains for each side would not be enough to make any serious points. It is therefore necessary to take a closer look. If a person spends $20,000 buying a car and another person who has $20,000 goes for a 60-month car financing at an average interest rate of 4.15%, who is better off? Over a 60 month period, the person who opted for financing would have paid back more than the $20,000 that person who made an outright purchase paid. However two important factors would determine who is better off of the two.
(a) The interest rate.
(b) What the person does with the funds freed up through finance.
When a person wants to make an outright purchase, all they are concerned with is the price there and then. Once the price is right to them, they pay and get it over with heading home with their new vehicle. This is not the same in the case of person making use of financing who is considering that aside from the cost of the car, the interest rate is even more important. To them getting the best interest rate possible is therefore a very important factor here and often where working with a broker can be handy to achieve this. Many car dealerships have their financing options but a smart buyer does their own research before going for any deal.
A broker can offer a better option because you have the opportunity to compare quotes from different lenders and this helps a potential buyer find the best deal. A good example is Finlease Car Finance.
And the available funds now?
After finding the financing option with the best terms the next thing is considering an investment that is safe and has an ROI that would be higher than the interest rates paid on the loan. With wise investment of the freed up funds coupled with competitive interest rates, the individual who went for financing can build up their equity while the individual who went for outright purchase would be experiencing the opposite because the car would be depreciating in value daily. That is $20,000 that is not daily depreciating.
So Car Financing and Outright Purchase – Which Way to Go?
It is pretty clear that for many of us its a smart move to opt for car financing rather than outright payment especially if the best financing deals are sort and the freed-up funds invested wisely. While one person’s funds and investment would be depreciating with the car, the others funds would be growing through investment such that even with the interest rate paid on the loan, the ROI makes up for it, leaving the individual with increased equity.
Made a decision to pay cash or finance recently? Know someone who did? Leave us a comment and dont forget to share.
***Image thanks to Tyler***