Having your own car is a big step in your life that needs careful planning—it’s definitely something that needs to be well thought out. One must not forget to always keep in mind the budget in hand to be able to determine the best way to purchase a car—be it with cash or financing with a down-payment.
Don’t know which is the better option? Of course, there are pros and cons to both ways and here are some of them to help you weigh in which path to take:
Pros and Cons of Buying a Car with Cash
No Monthly Payments
You get the peace of mind that your car’s fully paid already. That’s the great advantage that comes with buying a car with cash is that you don’t get to pay for an interest. You pay the exact amount shown in a cash deal and no more than that. You would not have to worry about any more late monthly payment deadlines once you cash it all in one time.
Zero Interest and Better Negotiation
Car salesmen will go after you once they learn that you’re looking to buy a brand new car with cash. This gives you zero interest, a great leverage, and a better position when it comes to negotiation. Okay, so what does this mean? You get better, cheaper deals than the listed price! How cools is that?
Buying a new car with cash does come with a price, and it’s called “opportunity cost” in economics. The reason why it may not be the best choice for many is because you lose a bulk of your cash assets in this one transaction. Buying a car with cash totally prevents you from investing that money in other investments or spending it in other assets that you need.
Pros and Cons of Financing with a Downpayment
You Get a Brand New Car with Only the Downpayment
If your goal is a new, new car, financing is the way to go for most people. If you have a budget of $10,000, you can use that money for a downpayment for a brand new car. It’s amazing how you can drive a brand new car for only a small portion of its listed price. But keep in mind that you’ll still be paying for the full amount…
Time Value of Money
Investors know the time value of money by heart. This means that money presently available is more valuable than the same amount in the future due to its earning potential. Sure, you may have the cash to buy a new car but spending only a small portion of this and investing the rest in stocks, bonds, or even a business can grow your money more.
Monthly Payments for Years
The big disadvantage of buying a brand new car are the monthly payments plus interest to pay off the loan for the expensive car that you just have bought. It may seem affordable today (especially if your salary is large enough for other monthly expenses) but take note that you’ll be paying every month for 3, 5, or more years!
Financing with a downpayment brings high interest that you have to follow through. This is why cars usually cost higher when under financing with a downpayment. The interest can really hurt your pocket but, if you play your cards correctly, you can easily outgrow interest by investing the rest of your cash in a higher interest rate as well.
Both of these options have their own pros and cons. But make sure to analyze which option will benefit you the most. Do you wish to buy the car cheaper than its listed price? Or are you willing to pay high interest to invest the rest of your cash in a long-term investment?