Buying a car is one of the most significant financial transactions you’ll experience. In fact, next to your home, cars are among the most expensive items you’ll buy during your lifetime. In order to realize the best value for your money, it is important to consider how you finance your next car buy.
There are a number of options available to people paying for cars. And since each buyer operates under his or her own financial constraints, there is no “correct” approach to financing a car purchase. As you prepare to buy a car or truck, consider the following possibilities, before committing to the best form of financing for your circumstances.
Pay Cash for Your Car
Your personal comfort level weighs heavily on your car financing decisions. Some buyers are averse to debt, for instance, so they save in advance for car purchases. New cars are expensive, however, so this strategy isn’t always open for consideration. Used car buyers, on the other hand, may find the wherewithal to cover the entire purchase price of a car using cash savings.
Like other funding options, paying cash for your car has advantages and disadvantages. Covering the entire purchase price with one payment eliminates interest charges, which ultimately reduces the overall cost of your car, compared to making payments over time. But interest rates are often quite reasonable, which begs the question: Should I keep cash on hand, rather than spending reserves on a car? The correct answer depends upon your financial circumstances and other considerations.
Conventional wisdom dictates that you should maintain at least enough liquid capital to cover 6 months’ worth of expenses. If your car buy depletes your savings below this level, it might make sense to seek financing, rather than covering the purchase with a single, lump-sum payment. Your credit history also plays an important role determining your eligibility for a loan, so paying cash may be your best option when reasonable financing terms are unavailable to you.
Lease Your New Car
Aside from financing a car purchase, leasing presents another option for staying on the road that makes financial sense for some motorists. Personal leases essentially allow users to “rent” their vehicles for a predetermined period – usually 2-5 years. The practice is gaining popularity in the UK, already accounting for a quarter of personal vehicles on US roads.
Your lease payment covers the car’s depreciation, so there are special conditions tied to most leases. Mileage, for example, is generally limited, to control how quickly the vehicle loses value. The length of the lease term and the strength of an applicant’s credit also influence the cost of leasing a car.
A lease commences with a down payment, which determines what future monthly payments will cost. To reduce the monthly amount of ongoing payment obligations, the lessee is commonly given the option of paying a higher deposit up-front. To find out if a lease is right for you, do your sums and compare leasing costs to those of buying a car.
Financing is Available
When leasing or paying cash are not suitable solutions, car buyers turn to a few financing methods to cover costs. For many, personal loans furnish adequate financing, which can be one of the most affordable ways to buy a car. To qualify, however, applicants need good credit, so this option is not available to everyone. If eligible, interest rates below 4pc make personal loans very attractive to car buyers.
Dealers routinely extend financing without interest, but a substantial deposit is required to qualify for such terms. Without cash on hand to cover high down payments, some buyers turn to “hire purchase” (HP) agreements to cover car costs. HP agreements require buyers to make nominal down payments, after which they pay installments until the purchase price is met. Ownership is transferred only after all required payments have been made. In addition to this drawback, HP interest rates are also considerably higher than other loans, which add to the overall cost of buying a car. HP agreements typically offer rates between 5pc and 15pc.
Your income, savings and debt-tolerance each influence your best approach to financing a car purchase. To make the most of your motoring budget, explore your options carefully and compare various financing alternatives. If you prefer to change cars every few years, a lease might suit your driving needs. Otherwise, pay cash or take out a loan to pay for your car purchase.