Next to buying a house, buying a car is one of the most expensive financial decision a person will have to make. But unlike a house, a car is a depreciating asset. So, while your house is an investment for your future, your car is a purchase that’s not going to give you a return on investment. Taking this into consideration, how you finance the purchase of your car becomes a crucial financial decision, one that can have an impact on not just your immediate financial situation, but on your future’s as well.
Let’s look at two of the most common car financing options that most people deal with: cash or car loan.
This is a relatively simple and straightforward choice. If you have the amount needed for the car as cash, you can simply pay for the car in full, purchase it outright and not have to worry about making monthly repayments. Most people don’t have that kind of cash readily available. But even if you do, it is a good idea to ask yourself if that cash is better invested in an investment that will give you a higher return than the interest you will be saving by not having a car loan. You can also consider using the lump sum to make a deposit on a home or to make a bigger repayment on your home loan. While paying cash to buy a car is a good decision, you can be smarter with your money and invest it in better alternatives that provide you with good ROI.
A car loan is the most common option that people choose when buying a car. It allows you to buy and use the car, while making payments for the purchase over the life of the loan.
The obvious argument against taking a car loan is that you will be paying an interest, which means you will end up paying more when you take a car loan than when you buy the car outright for cash. But, the reality is that a car loan is the only available option for a majority of people.
If you are in a situation where the only way for you to buy a car is by taking a car loan, then do so. But when you do, look out for these two important caveats:
- Locked-in interest rates – So you don’t have to worry about sudden rise in interest rates for the life of the loan.
- No penalties for higher repayments or early exit – Some loans charge you a penalty if you make more than the minimum required monthly repayment, as that will mean that you will pay off the loan quicker (and the bank will lose money by losing out on the additional interest payments). So, when taking a loan, be sure to check if there’s any penalty for early repayment of the loan.
If you’re looking to buy a car, be sure to sell your old car first. You can sell your car quickly and for top cash to a cash for cars business and use the cash received towards the purchase of your new car.