Paying Cash Versus Auto Loans
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by: laurawilder
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The most important thing you should do to prepare to purchase a new or used car is examine your finances. Before you even head to the car dealerships to start test driving cars, you should have a handle on how much you can afford to spend, regardless if you plan to pay cash or apply for auto loans. There are advantages and disadvantages to both paying cash and financing, so you will need to determine what is best for your financial situation.
Paying cash for your new car, rather than relying on auto loans, can be a very smart move, particularly if you have saved funds for the purchase. You will not have any paperwork, no one has to examine your credit scores and reports, and you answer to no one. As a bonus, if you pay cash for a car, you will likely not get in over your head financially. The car will be yours. You will possess the title.
Before you decide how much cash you want to spend on the car, however, you should ask yourself what you are sacrificing in order to purchase that car with cash. Maybe you need to pay for new storm windows, so should buy a used car. Or should you forgo the car for a few more years until your kids are out of college? For most car buyers who can afford to pay cash, they do not have enough cash liquid. They will likely take money out of an investment fund, which may incur some fees. Another consideration is simply that car dealerships are giving out some amazingly low rates on auto loans right now, which might mean your cash would pay better dividends invested elsewhere. The bottom line, though, is that cash is cash. You will not take on debt to pay for that car and it will be yours the moment you drive it off the lot.
In examining the options offered by various auto loans, the most important thing to know is what you can afford. By looking at your overall spending each month, you can develop a budget. Start with your overall take home monthly salary. Next, add up all your necessary spending (loans, electric bills, phone bills, tuition, etc.) Subtract that total from your take home salary. Then subtract the total estimate of what you spend on discretionary expenses, such as dining, magazine subscriptions, gas, gym memberships and clothing. Make sure you also include the amount per month you presently or hope to set aside for savings and retirement. Whatever you have left is what your budget can handle for a car payment. Keep in mind that you will need to make a down payment on the car, as well as pay for registration, inspection, license plates, fuel, upkeep and repairs. You can role play with a cheaper or more expensive car and see what you are comfortable with. Thoroughly outline all the costs before you take on any auto loans.
Know what you can afford, regardless if you plan to take on auto loans or pay with cash. Stay firm on that limit. Put it on a yellow sticky and put it in your wallet. Dealers always try to talk you up with fancy bells and whistles and what appear to be fantastic deals. The dealer will not pay your bills for you. Be true to yourself and do not spend beyond what makes you and your budget comfortable.
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