should you pay cash or finance your new car

Almost every experienced car enthusiast knows that shelling out money on a car, regardless of whether it is new or used, requires a ton of money. Depending on your financial statement, you have two modes of payment to choose from. If you have the resources and buying power, any expert would definitely recommend you to pay in cash. Cash is always a preferred mode of payment as there is no debt involved. However, not everyone has the privilege of counting thick notes on their fingertips.

For people who don’t have a strong bank balance, signing on a finance agreement seems to be the better option. Back in 2018, almost 1.4 million used car sales were made through finance. This was an increase of almost 8% compared to the previous year. Thus, financing options accounted for almost 1/5th of all used car sales. In this article, we discuss the best payment mode to get your hands on a used or new Hyundai Sonata; whether it is financing or paying in full cash depending on numerous occasions.

Advantages Of Buying A Car With Cash

For car buyers, paying with cash is the most straightforward approach that they could think of. The process is simple- you select the car that you desire, step foot in an official showroom or private dealer lot and offer them your bucks. Then you can just drive away with your favorite car without having to worry about any pending payments. The only thing left for you to pay will be the fuel, insurance, tax, and maintenance expenses. You can drive the car to your heart’s content without stressing about your credit check or any mileage limitations.

By paying for the car in a one-off payment, you can start saving up money each month to spend it on your next car purchase or any other stuff. You also avoid paying any extra interest as you have already paid for the car in full. Since you don't incur any monthly payments to a finance company, you can gather more savings for the future.

Thus, paying for a car in cash is the cheapest and most reliable option. Since you aren't under the burden of any financial agreement, you are the official owner of the car until the end of the term. Thus, you have full ownership of the car, and have a valuable asset on your hands. 

Whenever things turn south on the financial side, you have the freedom of selling your car to a local dealer or online car-buying portal. Similarly, if you decide to trade in your used car for a brand new car, you receive the full valuation of your used car that you wish to exchange. Dealers won’t deduct any money for wear and tear or excessive mileage.

Disadvantages Of Paying For Your Car With Cash

Every car faces the harsh reality of depreciation, unless you have a vintage car or limited edition car on your hands. The majority of automobiles lose 50 to 60% of their value within the first 3 years of ownership. Depreciation only slows down from the 4th year onwards. If you buy a new car with cash, be prepared to lose a significant amount of money owing to depreciation. Used cars depreciate at a much slower rate, but even these cars lose some of their value. Most used cars with almost 5 years of ownership and an average of 12000 miles per year sell at a very low price in the used car market.

You should always consider your bank account before you decide to pay in cash. For example, if you are considering purchasing a car worth $10,000 and you only have $12,000 as your budget, it may be wiser to instead pay a huge down payment and financing the rest of the money. You should always keep some savings by your side to aid you in case of emergencies.

Similarly, if you are investment-savvy, you can put the savings to good use. Using the above example, suppose you paid $5,000 as a down payment and are paying the remaining $5,000 through financing options. You can invest some of the leftover money into stocks or a high-interest bank account. Remember that this is a potentially risky investment, as there is no guarantee of good returns.

Why Financing Your Car Might Give You An Advantage

Car buyers have a variety of financing options at their disposal, which include PCP (Personal Contract Purchase), HP (Hire Purchase), Leasing, Personal Loan, or Credit Card. Each of these comes with its shares of pros and cons depending on the situation.

About 36% of car buyers took the route of financing options to afford their car purchase, according to a research by AutoTrader. Financing a car’s payment allows buyers to drive a car despite being limited by a tight budget. Gathering up enough savings for a car as a working-class individual is a painstakingly long process. Almost every individual needs a car to get to their workplace in a jiffy. Most of these individuals can’t manage to gather up enough monthly savings.

Financing options come in as the savior, helping the buyers to spread the lofty costs of a car over an extensive period of time. This procedure ultimately makes the car more affordable for low-budget individuals. To finance a car, every individual has to agree to pay a fixed monthly payment each month to the car dealer or finance company.

Financing a car allows the individual to settle for a much better car than what his monthly budget permits. Even if the person has only $6,000 in his bank account, he can drive a car worth $10,000 by paying $2,000 as a deposit and the rest of the cash through reasonable monthly payments.

Likewise, college students and others with extremely low budgets can only afford a used car worth $2,000, which is ultimately more likely to break down. Instead of shelling out $100 every month for petty repairs, the students can spend their money on fixed monthly payments for a much newer car that doesn’t incur any expensive repairs.

Downside Of Financing Your Car Through The Dealership

People who sign the dotted line on a finance agreement always have to pay interest. While you can find deals with 0% interest, they are mostly limited to new cars. Thus, buyers end up paying more for what the car is actually worth. Besides, certain financing options like PCP and Leasing add mileage restrictions to the equation. If you exceed the mileage limit, you have to pay additional charges depending on the agreement. The dealer will also charge you for any excessive wear and tear.

At the end of the finance agreement, you can decide to become the owner of the car or invest your equity into a new car or new finance agreement. However, without any additional savings on hand, you can get stuck in a loop of endless payments if you sign on to any new agreement. Signing on a finance agreement is always a big statement. If you fall into a financial crisis in between your agreement period, it can be hard to get out of the loop.

You might be stuck paying for a car you can’t afford at all. If you fail to make your monthly payments on time, the results can be disastrous. This will negatively impact your credit score, which might lead to your car being repossessed. Thus, you lose the car in the process and also end up with a debt.

The Decision To Finance Your Car With The Dealer Or Pay With Cash Is A Personal One

The saying ‘Cash is King’ also applies while buying an expensive object like a car. If you have the power to afford an outright payment of the car, we see no reason why you shouldn’t take on this bold step. However, paying for the full amount of the car in cash forces you to keep it as an asset. You also have to bear the brunt of depreciation. However, you have full ownership of the car, which allows you to sell it in times of trouble.

On the other hand, if you are an individual who doesn’t have the privilege of a financially strong bank statement, financing a car is the way to go. However, always make a responsible choice if you decide to finance a car’s payment. Don’t go overboard with a car way out of your budget that you ultimately can’t afford in the long run.