Should You Buy a Car Cash Down or Through the Finance Option?
In today's world, cars are evolving faster, increasing car lovers' passion. However, only some people can and have saved enough to buy a car outright without taking a loan or withdrawing money from a fixed deposit. This results in people wondering about buying car on loan vs cash in India.
For many of us, owning a car is a need as part of our daily job responsibilities; for others, owning a car is an aspirational value demonstrating to our contemporaries that we are successful.
Pay cash outright for a car usually takes time, commitment, or a relatively large paycheck. So most of us who don't consider financing furniture or appliance purchases take a loan to finance our vehicles without a second thought.
That is why financing is made available to those who qualify – and is the most common way of purchasing a car. Additionally, multiple financial institutions offer car loans to help customers buy their dream cars even when they lack funds.
With financing, you can pay for that dream car over time. (with an additional charge of "interest" as a fee for borrowing the money)
Again the question arises of whether one should buy a car cash down or via the finance route. However, before jumping to conclusions, let us look into both options' basic features and learn whether should we buy car on loan or cash.
Understanding the Cash Down Option
It is simple to pay with cash. You find the desired automobile, pay for it, and take possession of it. The only expense is what you pay the vendor for the automobile. Lower your out-of-pocket costs by trading in an old car.
There is no need for financing. Thus there will be no interest or fees. You will not have to make any monthly payments or incur any debt since you will own your automobile outright.
While this is advantageous because it is less expensive and more manageable than securing a loan, there are some potential drawbacks. First, remember that you pass up a chance to develop credit by paying cash.
Second, spending money on a car won't make you any more money. Cars, in reality, degrade as you drive them. So you must consider whether that money would benefit you more if invested instead.
If the returns on your assets exceed the financing expenses of an auto loan, getting a loan will be more advantageous than paying cash for your automobile.
Advantages of the Cash Down Option
Some of the advantages offered by the Cash Down Option are-
-
Simple Process
It is a relatively more straightforward process because there are three steps.
- Pick a car
- Pay the dealer
- The car is yours.
Apart from the registration, insurance, and other matters, you don’t have to spend time worrying about the credit checks.
-
Greater Flexibility
It is more flexible, as you can easily trade the existing car or sell the same at the time of purchase of the new vehicle. There is no need to worry about loan repayments or break fees, as the car instantly becomes yours once the payment is made.
-
Cheaper Source
It is cheaper because you don’t have to pay fees and interest charges.
Moreover, automobile companies love attracting customers with spectacular financing offers. However, the customer must remember that all these offers come at the expense of a higher price.
Disadvantages of the Cash Down Option
Some of the disadvantages offered by the Cash Down Option are-
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Limits the Choice of Vehicle
It limits the choice range as it might not co-inside with the money you physically have in your account.
It will leave you to settle for less featured, cheaper cars that may not suit your needs and may be at risk of having a short-lived life.
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No Credit Building
Getting a vehicle loan and making regular payments could assist you in establishing your credit history and enhancing your credit score. However, suppose you pay cash for a car.
In that case, you won't be able to grow credit through auto loan payments, which may limit your ability to obtain future credit for other purposes, such as getting a home or opening a business.
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Financial Impact
Cashing out a car requires a large amount of cash up front, which can influence your overall financial status.
Furthermore, paying in cash may drain your savings or investments, leaving you with fewer funds for emergencies, assets, or other financial goals dependent on the cost of the automobile.
Understanding the Finance Option
If you get a loan for your vehicle, it is in your best interest to search for the financial institution that can provide you with the best deal in terms of interest rate, loan terms, and service.
It will take time. You will also have to pay for finance, which will increase the price of the vehicle. You will, of course, make monthly payments and only own the automobile once it is paid off. However, if you make regular payments, you will build your credit and have the funds you would have put up on hand to spend as suitable.
Advantages of the Finance Option
The advantages offered by the Finance Option include-
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Expands the Choices of Vehicles
It expands the choice of vehicles as the price range increases. If you can comfortably repay the instalments, a car loan will help you buy a more expensive vehicle best suited to your needs.
But the terms of a car loan can sometimes limit the choice of vehicles you wish to buy.
-
Credit History
It builds and improves your credit score because it improves your credit score for future purposes when you successfully apply and responsibly repay the loan.
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Payment Over Some Time
It will not empty your savings. Thus, the process does not leave you at financial risk. Instead, a car loan stretches the time of car payment over many years by allowing monthly payments while keeping ample household finances to cover everyday costs.
You may also want to know the Best Car Loans in India
Disadvantages of the Finance Option
The disadvantages offered by the Finance Option include-
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Expensive Source
It is more expensive, as borrowing money and paying back the loan over time will include interest costs and other fees. Further, a car is a depreciable asset, and the amount decreases when you drive it off the lot.
So, after a certain period, the money required to pay off the car loan will be more than it’s worth.
Thus, before applying, you should calculate car loan EMI, the total repayment cost, interest, and other charges that decide whether you are ready to pay that cost.
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Higher Risk
It uses your vehicle as security, which means that if you fail to make repayment and default on your loan, the lender can repossess and sell your car to make up for the loss.
Which is Better - Car Loan vs Cash ?
|
Factors |
Cashing Out |
Taking a Loan |
|
Financial Impact |
Immediate out-of-pocket expense |
Monthly loan payments |
|
Opportunity Cost |
Potential loss of investment opportunities |
Ability to invest or leverage cash |
|
Credit Building |
No impact on credit |
Opportunity to build credit with timely payments |
|
Risk of Loss or Theft |
Risk of loss or theft of cash |
The loan is secured by the car |
|
Ownership |
Full ownership of the car |
Ownership with the bank until the loan is paid off |
|
Other Charges |
No interest or finance charges |
Interest charged on the loan |
|
Obligation |
No debt obligation |
until the loan is paid off |
|
Savings Usage and Impact on financial goals |
May deplete savings or investments and impact other financial goals |
It may require a smaller down payment, allowing for savings, investments, and other financial goals with available cash. |
Summing Up Car Loan vs Full Payment, which is More Feasible?
Many people wonder, should I buy car on loan or cash or contemplate about is it better to buy car on loan or cash, round the clock. Both options have their pros and cons. Thus, it is essential to consider what car you want to buy and how you plan to pay for it. Of course, using cash is the best way, as you don’t have to pay any interest.
If you cannot afford a big car, it is better to buy a small one, but try to avoid taking a loan for the vehicle. However, if loan rates are feasible, a loan can help if you can turn it to your benefit.
Buying a car on loan and investing the available funds in a mutual fund having a higher return than the cost of a loan might help you pan out an advantageous situation.
Happy Investing!