Financing a Car vs. Buying Outright: The Pros and Cons

Guest Post by Ethan Lichtenberg

Everybody wishes they could waltz into the car dealership and slam a suitcase full of cash on the table and say “I'll take it.” That situation is a fantasy to most, but for some, it is entirely possible. Most people in today’s world finance cars either through a bank or through the dealership. This usually benefits everyone involved. You get to drive a nice, trustworthy car around and pay less money upfront (which can save you money on car insurance for your new vehicle), while the dealership gets to add a little interest to the price of the vehicle.

There are positives and negatives to both financing your vehicle and buying it outright. Some outweigh the others, but overall it can be a tough decision if you do have the ability to buy a car in cash. Here are some pros and cons to help you weigh the options and find a sensible solution.

Financing your car

The most practical option for those who are unable to afford a cash transaction for a vehicle is financing your vehicle. Financing your car is a good thing to do… in most cases.

A better car

Let’s face it, we all want the best car we can possibly buy. It is human nature to want the best. If you have the ability to buy a car with cash, that’s the way to go. A solid warranty is a bonus as well. When you finance a new car at a dealership, more often than not it comes with a warranty that can save you a lot of money.

For example, let’s say you take out $10,000 to buy a used car outright so you don’t have to worry about payment. It’s a good choice. It may even save you money in the long run; however, if you bring that $10,000 as a down payment on a new car, you’ll be able to afford a wider variety of cars on the market. That high of a down payment paired with a modest credit score will net you a low-interest rate and a low monthly payment.

Monthly payments

The downside to financing a car? The monthly payments may seem to reach never-ending astronomical numbers. Most people finance cars for 48 months or 60 months. That means you can guarantee a large monthly payment just to drive around for the next five to six years.

Down payments can be a tricky game, but if you have a large down payment prepared, the monthly payment will be a lot less and auto-pay is also an up and coming way to pay bills. Regardless, a monthly payment is never fun and buying a car outright can eliminate that annoyance.

Helping your credit score

In the 21st century, we are all defined by a simple number — our credit score. Sad to say, but to buy anything of value, this number must be good. Having an acceptable credit score can get you a lot of things in life, so improving it at every chance you get is important. If you finance a car and make those monthly payments on time, your credit score will skyrocket.

On the other hand, buying cash will simply eliminate you making your credit worse, but it won’t give you the opportunity to make it better. Trust me, you won’t be able to buy a house with cash (talking to you Millennials out there). Having a good credit score is everything.

Buying outright

Cash rules the world, and it always has. So how could there be any negatives to buying a car with cash and walking out with no worries?

Monthly payments

You can forget about having to worry about monthly payments. Also, you don’t have to worry about paying interest. If you walk into the dealership and finance a used car worth $8,000 and end up with a 3 percent to 5 percent interest rate, you can guarantee yourself paying a few extra thousand on that car.

Buying that same $8,000 dollar car outright can save you time, money, and headaches. Be careful though — you could’ve used that money for a down payment on a sweet ride.

Cash is still king

Yes, cash still rules the world. Many car dealerships will even give you a large discount on all their cars if you pay with cash. Paying with cash eliminates the risks dealerships face, like losing money if you don’t make payments.

The bottom line

The car-buying world is a tough one. It will chew you up and spit you out if you don’t have the right tools and mindset. Anxiety may run high and keep you wondering which way buying a vehicle is best for you.

These tips and warnings will get you ready to buy that car, whether you want to finance or buy it outright. Keep in mind the pros and cons of each, and know what to expect before you walk into the dealership.

Ethan Lichtenberg is a writer for autoinsurance.org. He enjoys Edgar Allan Poe and sneaking off to the beach for an hour.