Should I finance a car?

How to decide if financing a car is right for you?

You have decided that now is the right time for that new car, but you are still undecided if buying the car with cash, or with car finance is the better option. For many people, aside from buying a house or investment property, purchasing a car is one of the next biggest financial commitments they will make. Whilst some people may not be able to afford to purchase a car outright, for others it may not make financial sense to do so. The question then may be should I finance a car, and how can I tell if car financing is the right option for me?

When considering financing a car it really comes down to personal circumstances. A good place to start is to ask yourself the following questions:

  • How often will I use the car?
  • Do I have a regular income stream or cash available to make regular monthly repayments?
  • Are there possible tax advantages to purchasing a car using car finance?
  • If I pay cash, will I have enough savings to pay for ongoing maintenance, registration and insurance?

Many of our clients who can afford to buy a car outright will still choose to finance instead. It’s worth weighing up whether saving the money you would be using for a lump sum can be put to better use elsewhere. To help you make the right choice for your situation, we have put together a comprehensive list of the pros and cons of buying a car using cash, or car finance.

Paying cash and purchasing a car outright

The most straightforward way to pay for a new car is by paying cash, as you know exactly how much you are going to spend, and you don’t have to apply or wait for finance approval.

The pros of paying cash when buying a car

  • Once you have paid for your new car and picked it up, that’s it. You don’t have to worry about ongoing car loan repayments or paying out a balloon payment at the end of your loan term.
  • When you pay for a car outright you avoid having to pay interest.
  • In some cases, buying a car outright can provide you more room for negotiation, as sellers know the purchase is guaranteed and don’t have to wait for your finance approval.
  • If you intend to upgrade or sell your car in a few years, you won’t have early exit loan fees to pay and you won’t be limited as to when you can sell your car.

The cons of paying cash

  • The time it takes to save the required amount. Saving tens of thousands of dollars can take time, potentially even years. Depending on how urgently you need a new car, you may not be able to save the amount quick enough.
  • Paying outright reduces your available ‘free cash,’ and depending on what other savings you have, you might not have enough in your emergency funds for unexpected expenses, repairs, servicing and general upkeep.
  • Depending on how much money you have to spend, you might be restricted in the type, brand or age of the car you can afford.

Paying for a car using car finance

When considering should I finance a car, it is important to weigh up all the pros and cons to ensure you make the right decision.

The pros of financing a car

  • There are numerous car financing options available to private and business consumers. These include secured and unsecured car loans, novated leases, chattel mortgages, car leases and hire purchases. Bear in mind the interest rates and fees associated with each will differ and it’s important to take the time to explore all options.
  • Car finance is more likely to enable you to purchase a newer and most likely safer car. Most new and later model cars are upwards of $30,000 with some commercial vehicles such as vans, trucks, Utes etc and large family cars well above $50,000.
    Opportunity cost: This refers to using the money you would spend on a car in other more useful ways. For example, paying down your home loan, investing it into shares, or allocating it to an emergency fund, could be more useful ways to use the money.
  • Car financing allows you to maintain your savings by paying back the cost of the car over several years.
  • In some instances, there might also be tax advantages when purchasing a car on finance for business purposes.
  • Having a car loan can help you to build your credit history, which might be helpful in the long term. Comprehensive credit reporting provides a detailed view of your financial behaviour and includes everything from your credit cards and bills to any loans and mortgages. Obtaining a car loan may come in handy if you’re considering purchasing a house in the next few years.

The cons of financing a car

  • You will end up paying more in the long run, as you will also be paying interest over the life of the loan. There are often options to reduce your car loan repayments by making repayments early and or choosing the shortest term that suits your budget.
  • When you obtain car financing you will often be paying additional fees and charges such as loan fees, early exit fees and account keeping fees, depending on the lender you choose.
  • Car financing may limit your choice of vehicle as some lenders require the car to be new or only a few years old. Additionally, depending on the type of car financing you choose to go with you may be limited on how much you can borrow.

Once you have decided to finance a car, how can you ensure you’re getting the best car loan for your situation?

Speak to a non-bank lender

Online lenders offer a range of options when it comes to car loan finance for both business and personal use. As they access their funding differently from traditional banks, in most cases they can offer lower, more competitive rates.

Calculate your estimated loan repayments

You should work out how much you think you can afford to borrow and repay before choosing to finance a car. Our car loan calculator can help you determine how much you can borrow and what your ongoing repayments might potentially be.

Look at the interest rates

It is advisable to speak to your lending consultant about what you might be able to do to qualify for a lower interest rate. Generally, if you have a decent-sized deposit and are willing to pay back your loan over a greater length of time, you can be eligible for a better interest rate.

Consider your loan term

You need to consider how quickly you can pay off your loan. Short-term loans often come with higher fees, but it also means you will own the car sooner and it might mean that you end up paying less overall.

Know your credit history

The more you know about your credit history the better. A poor credit rating could make it harder to find a low-interest rate loan, as potential lenders often see this as a higher credit risk and therefore charge a higher interest rate.

Whether you purchase a car outright or choose to take out car finance, it is a big decision. It is important to take the time to consider all your options and to do your research. Remember, it’s not just about how much the car will cost, but also ongoing maintenance costs, insurance and registration each year. Even if you can purchase a car outright if something unexpected happens do you still have enough savings on hand? If car finance sounds like it could be the right option for you, contact Grow Finance today to find out more about our car financing options.

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