Published on June 10th, 2018 | by Sunit Nandi0
Should I Buy a Car With Cash or a Loan?
For most of us, buying a car is one of the most important purchases we are ever likely to make. In this article, we’re going to compare the benefits and drawbacks of buying a car with either cash or a loan. This decision isn’t as easy as many would think as there are a number of key factors that all buyers should consider before jumping in. Have a look through this breakdown and see what sounds best for you.
Buying With Cash
If you’ve been saving up a lump sum, you’re probably thinking it’s best to just find a car within your budget and paying for it entirely with cash. Paying with cash alone is always the cheapest way to buy a car because it’s an instant and complete transaction meaning you don’t have to pay any interest over time. It’s also the best way to buy if you have a less than a perfect credit score and won’t be able to secure a loan with favourable terms. Here are a few vital factors you should definitely think about If you’re leaning towards paying with cash:
Having Some Savings Leftover
It can be very tempting for buyers to search for cars that are just about in line with their maximum budget. This often means once they’ve paid for the car, they won’t have left themselves enough for other responsibilities or unpredictable emergencies. When paying with cash it’s always best to find a car that’s well within your means and allows you to keep some of your savings in reserve for other costs that could spring up in future.
Pay As large A Deposit As You Can
This applies to those who aim to pay partly with cash and take out a loan or recieve finance for the rest. It’s best to pay as much as you can with a cash deposit, so that the amount you pay by loan is as little as possible; this will mean you pay as little interest as possible over time.
Pay A Small Amount With A Credit Card
Whenever you buy something with a credit card, you’ll receive a regulated amount of protection as stipulated by Section 75 of the Consumer Credit Act. In most cases you can achieve this by paying less than £100 towards your car with a credit card. This applies as long as the total price of the car is between £100 and £30,000. This law determines that the credit card company is liable to protect all purchases made with their credit, which means they’ll do all they can to help correct problems that could arise in future. If you’re buying from a dealer that is providing you finance, it’s worth checking to make sure that Section 75 applies to their product.
Using a card to pay towards a small amount isn’t always as easy as it sounds. In many cases, dealers tend to adopt a range of policies that can make things tricky. Examples include not being able to pay over a certain amount using a credit card or not allowing credit cards at all. The best thing to do is have a little shop around to compare different dealers and their policies towards credit card payments. As long as you can pay something on a credit card, you’ll get this added layer of protection which can make all the difference for your peace of mind.
Buying With A Loan
Buying with cash isn’t always the better option. Taking out a loan will be more expensive overall, but in certain situations it can prove more beneficial. It comes down to your individual circumstances. Here are the most important factors to consider when buying a car with a loan:
If You Quality For Favorable Interest Rates
If you have a great credit history, you’ll be able to apply for loans with relatively low interest rates and good terms. There are a number of different credit scoring methods used by lenders. Generally, the higher your credit score the better and the more likely you will be offered good terms on personal finance. You can check your current credit score on sites like Experian, which is a market leading credit bureau that have developed the widely used VantageScore 3.0 scoring model. Your score will range between 300 and 850. A score above 700 is generally considered to be good, while any score above 750 gives you the best chance of securing the most favourable credit terms.
If your credit score is in fine shape, buying with a loan can cost you minimal amounts more than buying with cash, but most importantly, you’ll get to keep hold of your savings. This can be hugely beneficial to those that would prefer to use their savings for other purchases or investments. Most buyers in this position will believe it’s worth holding onto their savings as it allows them the option of making an investment that will likely more than cover the extra cost that comes with buying with a loan.
Shop Around For The Best Rates
Just like the prices of any other product, interest rates can vary between lenders. As a car is such a high value asset, any small differences in interest rates can equate to substantial amount of money. Don’t shy from getting initial offers and then looking around to find better options. You can use handy repayment calculators to compare loans and their repayment terms. The interest percentage is often just one part of the repayment plan of any loan. The APR (annual percentage rate) is the figure you should look for in your comparisons as this shows you the total amount of you’ll owe per year including all charges, fees and interest.
To Sum Up
- Go for cash if you want the cheapest purchase overall, have more than enough saved to cover the cost of the car and don’t believe your credit score is in perfect condition.
- Always try to pay a small amount towards the car with a credit card in order to secure added protection.
- Consider a loan if you have a favourable credit history and would prefer to use your savings elsewhere.
- If you intend to take a loan, shop around to find the best APR possible from different lenders.