The truth of getting a car loan exists somewhere between “never” and “always.” There is no objective valuation of when a loan is better than cash, but there are some ideas that could help push someone towards a direction that works for them. Though the common argument is that cash is better, there are some flaws to the idea.
The Cons of Cash Money
Paying with money has obvious pros because it avoids interest rates from a loan, a monthly payment, and the burden of debt. So how about the cons? Cash assets are known as liquid assets, and they are the most powerful type of asset due to their flexibility. Many cash buyers do not want to just put out $25,000 for a car. They have a better use for their money. For example, they can place it into a CD that makes 10%. Let’s say, for example, the car loan has a 5% interest. That is still acceptable to the buyer. She is still making 5% on the CD (because the car loan interest rate is being subtracted). In short, the money is much better off in a CD as opposed to being exhausted immediately on a vehicle.
The Back-Up Plan
Most car buyers should avoid a loan unless they have almost enough cash to buy the car anyway. This may sound counter-productive, but the logic is sound. If a buyer hits a bad period, they can simply pay off the remaining loan balance. They may also throw in a very high down payment to dramatically decrease the interest. Put simply, people that cannot afford the car should not be buying it. Save up and try again next time.
Buyers make a lot of mistakes when it comes to buying a car because they are attracted to the idea of owning a new vehicle. Loans do not need to be avoided entirely because they work for people that have better ideas for their money. But, they should not be sued to get something beyond the budget, beyond the emergency fund, and beyond what can be afforded every month for many years.
Benefits to Getting a Car Loan in Canada
In a perfect world, there would always be money enough to supply whatever a person could want or need. Constructs such as loans, credit, and financing would have no reason to exist. Unfortunately, the world is not perfect, and people rarely get everything they desire and need. However, there is something that every young, healthy, and hard-working adult does need, and that is a mode of personal transportation, a means of traveling from one place to another. This need increases when one lives outside the routes of the city transit system. Transportation is a specific life requirement that is key to fulfilling one’s educational, work, social and family needs. For most people, this means a car.
Each Person’s Situation is Unique
Some young people begin their adult lives blessed with more material support than others. Such individuals are often provided a vehicle to drive, free of charge, by their parents. Others worked while in school, saved their money, and accumulated a substantial savings account. Some saved enough cash to purchase a car outright. Such initiative is admirable, and the question deserves asking whether this is the best use of such hard-earned money.
To Pay Cash or Not … That Is the Question
In the end, the question of the day (and person) is this: Is it always best to pay cash for a vehicle? The honest answer is conditional: it depends. It depends on an individual’s particular circumstance, which in turn depends on ever-changing variables such as the economy and current interest rates. Of inestimable and mitigating influence are those factors unique to each, such as available assets, income, current indebtedness, credit worthiness, financial goals, and the like.
Without a doubt there are times when it is best to pay cash. For example, pay cash when the standards you’ve set yourself require it, such as when you’ve committed to living without incurring debt. Additionally, pay cash when your sole desire is to pay as little as possible, or to avoid paying interest.
Another noteworthy and influential component in the pay cash or not equation is pride that a person feels when he pays cash for a large-ticket item such as an automobile. It is natural for one to feel proud in this circumstance, not only of his great deal, but also of having the ability to pay cash. Not everyone can. People who are fortunate enough to have this sort of cash have an opportunity and a responsibility to use it wisely. It is always wise to consider whether paying cash is the best policy in any given situation.
There are cash advocates who insist that cash is the best policy for everyone, but to their bold assertion come answers from an equal if not greater number of financial advisors who hold up a cautionary finger. They insist that just because someone can pay cash for a car does not necessarily mean that they should. They believe that there are particular instances when it truly is in a person’s best interest to finance a car loan.
When to Finance, Even If You Have the Money
When is it smarter to borrow money than pay cash? When it is advantageous to your bank balance for you to do so, that’s when! Consider financing if you qualify for special interest rates, or when you’re patient enough to shop around for the very best rate. Various types of financial institutions provide an array of different interest rates, rates which vary even within a category. The best (lowest) interest rates are frequently only available to borrowers with the highest credit ratings.
Dealerships tend to offer special rates for new cars, as well as for end-of-year models, which as the smart shopper knows, must be sold to make room for incoming inventory. When interest rates dip as low as 1-2% for stock the dealership is motivated to move, the situation becomes intriguing for at least some shoppers enjoying a bank balance that is solidly in the black.
Savvy buyers know their position is enviable when not only do they have the ability to pay cash for a car, but the car they prefer is one favored by special rates. This is because buyer loan costs fluctuate in lock step with prevailing interest rates. With premium rates of only 1-2% percent it is possible to purchase the car over time at a low interest rate, saving one’s cash for investments that make a profit.
Other Benefits to Financing a Car Loan
Nobody but the person who must make the decision and assume the burden of payment needs to be involved in the ultimate decision. You’re the one assuming the responsibility and burden of payment. You may find it is possible to buy a newer, more attractive, safer and more dependable vehicle by financing. Sometimes, this may be the desirable thing to do, such as when trying to get a young driver into a car with the highest safety rating. Only you can determine the importance of such variables to your unique circumstance.
When you tally the pros and cons, it would seem there are as many advantages – and possibly more – to financing a car’s purchase than not. The best decision for one person won’t necessarily be the best for another. The thing for people to realize is that each situationally dependent. Not everybody should finance a car. However, the potential for substantial benefit exists for some, and outweighs the added cost of interest.
Do Your Due Diligence
Not all opportunities are desirable. Car finance is an area where due diligence and research are key. Determine the taxes you’ll be charged for a given car, and don’t forget to check the cost of insuring it. The difference in the cost of insuring a new vehicle and an older model of the same car is startling. Financing costs themselves can get out of hand if the cost of the car is more than you can afford, or if the interest rate is excessively high. It is to a buyer’s benefit to begin the work of researching available finance options as soon as he has determined to purchase a particular vehicle. Approach your search for financing with a cool head. Don’t allow yourself to be led astray by your desire for that pretty new car. Exercise your self-control, and employ the same logic and reason in your decision making process as you would any other purchase.
Learn from the Mistakes of Others
Sadly, there seems no end to the number of examples of what not to do. Learn from watching some of these, and avoid any semblance of the actions of anyone that treats their decision to finance their purchase as an open-ended opportunity for a spending spree. It is easy to get swept away by desire when buying a car. It’s also surprisingly easy for people to convince themselves that their wants are needs when in truth, they’re not. Know yourself, and beware.
Determine Your Basic Needs
It’s never a bad idea to start your car search by defining your basic transportation requirements. What do you need? What features and attributes do you feel are most important? Which ones can you live without? Do you feel you need a new or used car? Why?
Once you understand the difference between what you absolutely must have, and what you merely wish to have, you’ll be in a far better position to recognize the deal that benefits you best when it comes along. If you’re like most people, you’ll end up with a car that easily covers your needs, and likely more than a few of your wants. An advantage of this approach is that you’ll enjoy any upgrades you end up with more freely because you know you can live without them. It’s always possible to upgrade from one’s basic needs. It’s not nearly so easy, however, to travel in the reverse direction, so be guided by your needs, not your wants.
When determining priorities, it goes without saying that you want your transportation to be safe and dependable. It’s also imperative it suits your unique needs. Needs will vary, of course, from one buyer to the next. The homeschooling dad might require a bus to transport his larger than average family. The single commuter desires a gas sipper. The farmer needs a truck. That fisherman next door to you with the huge boat? He’ll have to have a trustworthy SUV equipped with a stout towing package! These sorts of considerations are essential when determining the best vehicle for you. It is equally vital that you give thought to the smartest way to pay for what you want and need.
Develop the habit of sleeping on any big ticket purchase decisions for at least a night or two. Additionally, consult with the financial advisors you trust. While you may continue forward on your path to commit your money, you’ll not regret having made that decision thoughtfully, and will be less likely to doubt it in the future. You know that the last place you want to end up down the road is upside-down in your loan! Consider the excellent advice offered by experts: Set a spending limit before you go shopping and then stick to it. You’ve made the best possible decision, and now it’s time to enjoy your new ride!