Is Financing a Car Better Than Paying Cash?

Most people assume that buying your car outright with cash is a much better option than the alternative, financing. While the advice you are likely to receive from people is, why would you get finance when you’re in the enviable position to pay cash outright? It may sound surprising, but when interest rates are at record lows, it can be smarter and more beneficial to utilise a finance option. According to even if you have the cash on hand, there are many benefits from borrowing the money rather than paying outright.

Below we look at the pros and cons of using finance to purchase a car or paying with money outright.

Benefits of Finance

There are many pros for using finance for your next car purchase. Some of these you may not have considered but give you the advantage of flexibility.

  • Low-interest rates: Interest rates are currently at record lows in the current economic climate. This means you have the potential to get a better car with loan repayments that work within your budget. With these lower rates, you will be paying back less than you think.  This low interest rate is fixed for the life of the loan and means you can avoid the inevitable future interest rate increases.
  • Make an upgrade: Choosing the finance option means considering a newer or more suitable vehicle sooner than expected without having to wait and save. Newer vehicles have all the bells and whistles to keep your family comfortable, entertained and most importantly, safe.  As businesses grow and evolve, so too do their vehicle requirements.  Did you know that any accessories, such as tow bars, ladder racks or custom trays, can be included in your finance amount?  This means you can upgrade to the exact vehicle spec that will suit your business now!
  • Build on credit history: When you have manageable car repayments, that are paid on time every time, it demonstrates to lenders that you are financially reliable. This type of solid credit history can be helpful when seeking a home or investment loan in the future.
  • Tax deduction for business owners: The interest costs are tax-deductible if you purchase your vehicle as a business investment. You stand to gain more financially this way rather than paying outright with your own savings.
  • Free up cash flow: Using car finance means that your savings remain available for any emergencies you may face, to take a family holiday or as a backup when you need it.

Disadvantages of Finance

While the disadvantages are few, there are some issues you may wish to consider before applying for aid.

  • Interest paid: The reality is no matter how reasonable the rates are, you will be paying more than the drive-away price when you use a loan. However, there are opportunities to get ahead on payments and reduce your interest. Most consumer loans allow you to make one-off extra repayments when and if you desire.  Perhaps your next work bonus, a windfall or a tax return payment can be used against the loan. This will reduce both the term of the loan and the interest paid.
  • The car used as security: It’s likely that when you buy a car from a lending institution, if your loan isn’t paid, they are likely to use the vehicle as collateral, and it could be repossessed. This is an unlikely scenario and does not occur very frequently.

Benefits of Paying Cash

While the benefits of gaining finance far outweigh buying your next vehicle with your savings, they are worth looking at.

  • Done and dusted:Once you’ve handed over the money, it’s all yours. There are no monthly payments, and you only pay what it’s worth, with no additional fees.
  • Flexible: You can buy whatever car you want based on your budget. This is particularly true for an older vehicle that lenders may not consider financing based on age.  In this case, you could purchase the car using a personal loan.  The car is not used as security and the funds approved for a personal loan can be used to purchase anything you want, so age doesn’t matter.
  • Cash interest:While we are in the current Covid crisis, interest rates are low, which means money that’s sitting in the bank isn’t gaining much interest. Instead, you could put it to good use by buying your vehicle with cash.  Your financial advisor may think otherwise and suggest using your cash as a deposit for an investment property!

Cons of Paying Cash

Likewise, there are cons to paying with your savings and it will help you make your decision either way.

  • Save for longer: Putting money away for that something special takes time, especially during a pandemic when resources are fewer. It could take years, and you have to decide whether waiting to save is worth it.
  • No backup for emergencies:Most people like having cash on hand for emergencies. Whether this is medical, an unexpected bill or another Covid lockdown. Paying it all out on a new or used car leaves little or no cash reserves when you need it.
  • Potential limitations:We’ve ascertained that it takes time to save, which limits how much you spend. Having fewer financial options means you’re likely to get an older model with less features and safety options than what you would like.

Loan Repayment Calculator

Before making your decision about seeking a loan it is prudent to use an online loan calculator to gain a clear understanding of what your repayments would be and if they will fit into your budget. They can calculate a fortnightly or monthly repayment, based on an estimate of your interest rate and the amount you would like to borrow.  Your actual interest rate is determined by your previous credit history, employment and residential status and the type and age of the vehicle you will be purchasing.

Financing a car can be better than paying cash!

As you look at each of these pros and cons, you can see that the benefits of a vehicle loan far outweigh choosing to pay with savings. Due to current low interest rates, there is no better time to get financial assistance to purchase the exact vehicle that you want.