There are two alternatives while making any purchase. You can either buy it for cash or take out a loan for it. Yes, you can even buy a home or a car for cash but most people rely on loans to make purchases that involve big amounts. There are several reasons for it such as:
- They do not have to do away with a large amount of money at once and lose on the opportunity to earn more money by investing it somewhere else
- It does not affect their budget as it is easier to pay a small amount every month than to part away with a major chunk of their savings
- There are also tax benefits when you take out a loan as opposed to paying the entire amount from your own pocket at once and
- Most importantly, most people cannot afford to pay such a huge sum of money at once and lots more.
All these point out at one specific thing: cash purchase is only an option when you can afford it. By affording it does not mean your ability to part away with a huge amount – mind your cars can be very costly – but also your affordability in several other aspects as well. These are:
- The interest amount that you will save from your cash purchase as compared to the car loan that you could have obtained
- The opportunity cost that you will lose in the form of your income from that specific amount of cost
- The rate of interest provided with a savings account that is nearing to zero these days and lots more.
This means that you will need to first take out enough time to sit down with a pencil and paper and make proper comparisons to make an informed and educated decision.
Costs of deferred payment factor
In addition to the above, there are a few other factors that you must consider to choose between cash purchase and taking out an auto loan.
- The costs of deferred payment which is a common term or pitch you may have heard but do not know the actual meaning and the effect of such terms such as ‘No payments required for six months!’
- These alluring terms do not necessarily mean that you can use the car for free for the next six months. If you think so then think again! Loans that come with such types of catchy phrases have a high chance to have terms that will accrue interest all the time.
You may ask why it is so. This is because you will not be paying any amount as down the principal to start with. This is where the auto financers play with you. This feature of the loan means you will have to pay interest for an additional six months on your entire loan balance in the long run. This is the extra income of the lenders.
When you consider and afford to buy your car for cash you are saved from such extra payments and worries.
Direct and indirect lenders
When you take out a loan, and car loans are no exception, you will get both direct as well as indirect lenders.
- Direct lenders are those banks or any other financial institution, credit unions and even online lenders such as Liberty Lending and others.
- On the other hand, the indirect lenders are those car dealers that offer loans to consumers to buy a car having a tie-up with a bank or any financial institution.
Opting for direct lenders is the safest bet though processing time may be a bit more as compared to loans offered by the indirect lenders.
- However convenient dealer finance may seem like, you must be aware of the mark-ups on the rate of interest that you may sometimes receive.
- In addition to that, there may also be a few other charges and financial ‘incentives’ that will eventually raise the cost of your loan.
Therefore, do not settle for dealer financing unless you know about its terms and conditions or find any independent loan offer with which you can compare it with.
Do not want to get involved in such hassles? Well, the best option is to buy your car for cash.
Price and loan terms
When you choose to finance for your car arranged by the dealer rest assured that it will affect not only the cost of the car but also on the rebates that may be applicable for such kind of purchase.
Therefore, while negotiating with the dealer for the price it is best to tell the dealer that you are yet to take a call on the financing aspect of your car. Hence, you will like the dealer to quote the price of the car with as well as without financing.
This approach will eventually help you to differentiate the cost of the two and know the true cost of financing your car through the dealer instead of any direct lenders.
A cash purchase will not have any such points of worry!
Captive and independent lenders
The two most important players in the auto finance industry are the captive lenders and independent lenders.
- Captive lenders are typically those finance companies that are owned by a dealer and
- Independent lenders are the outside companies that the dealer may work with on an agreement to arrange for financing a car to the consumers.
However, independent dealers may also have financial agreements with the dealers so that they steer businesses to them.
Therefore, you must essentially know the relationship of the dealer with the lender so that you can find out whether or not the dealer can truly try and find the best deal for you or will be funneling business to its affiliate.
Summing it up
Finally, consider the early payment fee aspect if you wish to take out a loan to buy your car before you sign up. This may have several consequences such as adding the cost of early trade-in old car for new.
Since you will have to live with your decision for years, put some time on your research.