Financing Options: Pro & Cons
When it comes time to purchase a vehicle, you may feel lost, confused or maybe even frustrated at the complexities of the financing process. Depending on your credit history, cash flow, cost of vehicle, trade in value, etc…getting into the car of your dreams may not be a reality. However with several financing options, chances are you’ll find a great deal! Let’s take a look at what the main financing options are and the pros and cons of each.
The first and probably least common method of purchasing a vehicle is to pay for it in full using cash. Albeit difficult to save several thousands of dollars, this is the simplest (not easiest) method of buying. Many may find this as being outdated; old-fashioned and impractical for today’s standards, but this method of buying has huge benefits that far outlive the thrill of a new car.
Pros: When making a large purchase with cash, retailers can often give you a better deal if you are paying with cash. Just make sure to ask, just in case. Paying in full saves you money due to saved interest. Making payments over the lifetime of a car loan will cause you to pay MORE than the initial price tag on the vehicle because of the accrued interest. Therefore the money saved from paying cash is money back in your pocket!
Cons: The only con to this financing option is the difficulty of saving money. There is no doubt it takes self discipline and time to achieve this goal, but it can be done! Save enough cash to purchase a drivable, yet inexpensive vehicle, pay it in full, and while driving it, continue to save back a “typical car payment” each month and before long, you’ll have enough money saved to upgrade and pay cash for a better vehicle. Continue this cycle until you get into the vehicle you really want. It’s our Grandparents way of buying. It’s tough but it works.
Buying a vehicle on credit means you are borrowing the partial or full amount of cash needed to purchase the vehicle. Borrowing money will always require a fee called interest. As long as you are borrowing money, you are required to pay interest. The longer you borrow, the more interest you pay. This may sound very elementary to many, but with fancy wording and manipulative marketing techniques, what it comes down to is you must pay money to borrow money. The amount of money you pay is determined by the rate of interest. Most dealerships have working relationships with lenders and if you finance through their preferred lenders you may be able to get a better (lower) interest rate.
Pros: The benefit of financing a car through credit loans is that you are easily able to get into the car you want. As long as you have a decent credit history, most dealers will be happy to lend you money (again, they are making money) to get you what you want. There are when we are unable to save quickly enough and need to purchase a vehicle. In this case credit lending provides you the option to get into a vehicle when you need to.
Cons: The cons of financing a car are that you end up paying more for a car than it is worth because of the accrued interest. Many will also finance above a level they are financially comfortable with due to buyer’s impulse, change of insurance premiums, larger gas tank, unknown engine troubles, more expensive tires, etc…Because financing is so easy and accessible, instead of trying to finance for as little as possible, people end up financing the entire amount. Common sense knows it is not wise to borrow at your maximum amount.
Lease Leasing a vehicle means you are not really buying, but rather borrowing or renting a vehicle. There are several terms and conditions that apply to leasing a vehicle and if broken may end up costing you a lot of money. Leasing a vehicle can be compared to renting an apartment. There are situations where it’s convenient and the better option, however when compared to owning a car, or owning a home, you would choose to own for the best long term investment return on your money.
For an individual whose job is inconsistent or requires extensive travel or time away from home, such as a soldier in between deployments, it would make more sense for that individual to lease a vehicle if they were in a very mobile state in life. Leasing also provides flexibility to turn in your “old car” when you are done and get a newer model. If you the type who enjoys frequent upgrades, leasing may be an appealing option to you.
From a financial investment perspective, leasing is a bad choice. It is in essence putting money into a pot you will never get anything back from. You may put a down payment on your leased vehicle and then proceed to pay several thousands of dollars over the life of your lease and at the end walk away with nothing. For the long term, leasing is a bad idea.
No matter what method you choose to buy your next vehicle, it is important to keep in mind the pros and cons of each of these three basic choices. Evaluate your overall financial situation as well as what will best fit your lifestyle. Anticipate extra expenses to pop up and make sure that you don’t stretch your wallet too thin or you will never fully enjoy your new car!