Purchasing a car in cash, rather than financing it, seems like a great idea. You won’t have to pay any interest, the vehicle becomes yours outright, and your credit rating won’t be affected. However, in most cases, this isn’t the best thing to do. Even if you can pay cash for your next car, taking out a loan is actually the best move.
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The Differences Between Financing And Cash
If you’re new to the car-buying world, then you need to pay close attention to this section. There are usually two different ways to buy a vehicle. You either finance it or pay cash. Financing requires you to take out a loan. The dealership, such as Fiesta Kia, has special finance employees who will run your information and find a lender willing to handle the purchase.
Paying cash just involves taking the final total (tax and all) and getting a bank check for the amount. It’s no different than buying groceries, although the amount is much higher.
With financing, you have more vehicle options to pick from. Here’s an example – you have $10,000 earmarked for the purchase of a car. Instead of buying a used car for that amount, you can take that money and put it down on a brand new car. The remaining cost for that model will be loaned to you from a financial institution.
The downside to this is interest must be paid on that loan. The payments are due monthly and depending on the loan period; you’ll pay them for several years before the car is officially yours.
Keeping Your Cash In Your Bank Account
The word “interest” scares people. They don’t want to pay any more for a vehicle than they have to. This is why some people choose the cash option. There’s no lender involved, and the car is theirs right away. They pay the sticker price plus tax. End of story.
However, here’s another way to think about it. If you have enough money to pay $25,000 or more in cash for a car, then the odds are good that your credit rating is very high. This gives you some leverage when obtaining an auto loan. Qualifying for a low-interest loan is practically a given in this example. You end up with a $15,000 loan (after a $10,000 down payment) at only 1% for several years. In all, you’ll pay around $300 to $400 in interest before the loan is paid off. You also have $15,000 in cash sitting in your bank account. Now, how much would you have earned in interest from your bank on that remaining $15,000? It’s probably more than the amount that you’ve paid in interest on your car loan. This means that the loan is worth it.
Finding The Best Loan
Before you run out and buy a new car from Fiesta Kia in cash, take the time to shop around. You might find a low-interest loan is a better option than paying cash for a vehicle.