In today’s world, cars are evolving faster, which increases the passion of car lovers. Few people who have the ability, and have saved enough money to buy a car outright, without taking a loan or say, withdrawing money from a fixed deposit.

It usually takes time, commitment, or a rather large paycheck, to pay cash outright for a car. Most of us who don’t consider financing furniture or appliance purchases, take a loan to finance our vehicles without a second thought.

This is why financing is made available to those who qualify – and is the most common way of purchasing a car. There are multiple financial institutions that offer car loans to help customers buy their dream cars even when they don’t have enough funds.

With financing, you have the option of paying for that dream car over time (with an additional charge of “interest”, as a fee for borrowing the money)

Again the question arises that should one buy a car cash down or via the finance route. Before jumping into any conclusion, let us look into the basic features of both these options.

Cash Down Option

Advantages of the Cash Down Option:

  • +Simple Process

    It is a relatively simpler process because there are three steps
    (1) Select the car
    (2)Pay the dealer
    (3) The car is yours.

    Apart from the registration, insurance and other matters, you don’t have to spend time on 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 car.
    There is no need to worry about loan repayments or break fees, as the car instantly becomes yours once the payment is done

  • +Cheaper Source

  • It is cheaper because you don’t have to pay fees and interest charges. Moreover, automobile companies love to attract customers with financing offers that sound spectacular.The customer must remember that all these offers come at the expense of a higher price.

Disadvantages of the Cash Down Option:

  • +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.

    This will leave you to settle for less featured, cheaper cars, that may not suit your needs and may be at a risk of having a short-lived life

  • +Usage of Savings

  • It drains out your savings in one go. Savings are accumulated over time, and letting it go in the blink of an eye puts you back to square one. And then you have to start the process all over again.

Finance Option

Advantages of the Finance Option:

  • +Expands the choices of vehicles:

    It expands the choice of vehicles, as the price range increases. As long as you can comfortably repay the installments, a car loan will help you buy a more expensive vehicle that is 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, when you successfully apply and responsibly pay back the loan, it potentially improves your credit score for future purposes.

  • +Payment Over a Period of Time:

    It will not empty your savings, thus, the process does not leave you financial risk.

    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.

Disadvantages of the Finance Option:

  • +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 the moment you drive it off the lot.

    So, after a certain time period, the money required to pay off the car loan will be more than it’s worth. Thus, before applying, you should calculate the total cost of repayment, interest, and other charges that decide whether you are ready to pay that cost or not.

  • +Higher Risk:

    It uses your vehicle as security, which means, 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.

  • Conclusion

    Both the options have their own pros and cons, thus it is important 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 to buy a big car, then it is better to buy a small car, but  try to avoid taking a loan for the car. At present, with loan rates falling, a loan can help, if you can turn it to your advantage.

    Buying a car on loan and investing the available funds in a mutual fund having a high return than the cost of loan might help you to pan out an advantageous situation.

Happy investing!

Disclaimer: the views expressed here are of the author and do not reflect those of the author