Is financing a car worth it?
People often ask: Should I buy a car with cash? The answer isn’t straightforward. Paying cash for a car will get you the car at the lowest price, but you might miss out on opportunities to use that cash more effectively.
The answer also depends on your individual circumstances and financial status.
First, consider if owning a car is right for you.
Do you need a car?
If you’ll use it daily for your job or school runs, then owning a car makes sense. But if you’re only going to use it occasionally, you should compare the cost of owning a car to the cost of using a taxi or public transport.
When comparing the costs, include all the costs of owning a car, like:
- Insurance
- Petrol
- Maintenance
- Loan repayments
- Parking
What car do you need?
Whether it’s worth financing a car might also depend on how expensive the car is. For example, if you need a car for little more than running errands on a weekend, buying a second-hand car cash might be worth it.
But if you need a reliable vehicle for a long daily commute or for work, you might consider buying a new car or a low-mileage second-hand car even if it means getting a car loan.
Your support structure could also impact this choice. If you’re single, buying a new and reliable car decreases the chances of getting stuck at the side of the road. If you have a large support structure, that may be less of an issue.
If you only have enough cash for a second-hand or small car, you could consider financing a newer or better car if:
- You need a large family car
- You want the car to last for many years
- You need optional features like an automatic transmission or sunroof
- There’s a good deal that’s only available for a limited time
Should you finance a car?
Once you’ve established you need a car, and the type of car you need, your next choice should be whether you pay cash for the car or finance the purchase.
There are several benefits to financing a car:
- You can buy the car sooner
- You may be able to buy a more expensive car
- If you make the payments on time, you’ll improve your credit score
The drawbacks to financing a car include:
- You’ll pay interest on the loan, which increases the cost
- You risk losing the car if you can’t make the payments
Your credit score and credit history may also impact your ability to get affordable finance, and that may impact your answer to the question: should I get a car loan?
Is it better to buy a car outright or finance?
According to some experts, there are reasons why you should never pay cash for a car. For example, if you’re using your cash reserve fund to buy a car, you’ll be stuck if something happens to your regular income or ability to work and may have to use expensive debt like credit cards to tide you over.
You should also look at the opportunities you forego by using the cash to buy a car. For example, if you invested the money instead of buying a car, you might be able to get a return on investment that exceeds the interest you’ll pay on a car loan.
Alternatively, if you had an opportunity to buy a classic car, and that brand had a track record of increasing in value over the long term, it might be worth your while to buy the car using a classic car loan to realise that capital growth, rather than wait until you’ve saved enough money.
What are your other car-buying options?
People may consider financing a car by using credit facilities they already have. But it’s not a good idea to use credit cards to finance a car, for two reasons:
- Credit cards are unsecured loans and the interest rates charged for unsecured loans tend to be higher than those charged for secured loans, like car loans.
- If you can’t pay back a credit card, the lender may apply to have your entire estate sequestrated. In contrast, if you can’t pay back a car loan, the lender usually just takes the car back.
What about home loans?
Using the surplus funds in your home loan to buy a car may seem like a cheaper option, but it can be more expensive because:
- A home loan is paid off over decades, rather than a few years, and all the time you’re paying interest on the principal
- You’ll have less money to put down on your next property should you want to upscale
- If you can’t pay your monthly instalments, you risk losing your house
- It may be more expensive overall to refinance your home loan than to get vehicle finance
Is car finance worth it?
Not all car finance is equal. In addition to the factors mentioned above, you’d also have to consider and compare:
- The type of car finance
- The interest rate you’ll pay
- The duration of the loan
For example, if you started working for a new company as a travelling salesperson and earn a commission, it may be worth your while to buy a reliable car with a financial car loan that has a balloon payment at the end. That’s because as you get more clients and your earnings increase, it will become easier to save for that balloon payment. A balloon payment will also lower your immediate monthly costs when your earnings are still low and make it easier to qualify for the car loan. (If the sales job doesn’t work out, you can always sell the car to cover the balloon payment.)
Types of vehicle finance you could consider include:
For example, a small business owner would compare the costs of buying a car for their business using a personal car loan or a business car loan and discuss the tax implications of each choice with their accountant.
National loans can help you get a car loan. We can even help you find a vehicle. Contact us at hello@nationalloans.com.au or phone 1300 786Â 859. Click the big red Quick Quote button, for a free quote.
