Cars: Financing

Finding a car you want to buy may be easier than lining up lenders to discuss car financing. Making a purchase of a new or used vehicle involves various options. You can pay cash, borrow the necessary funds or consider leasing the vehicle. Each of these options offers advantages and disadvantages to you who must weigh them appropriately. The financing option that is best for you is based on your circumstance and need.

Paying cash involves simply paying the agreed purchase price with funds you have available. This represents one of the simplest ways to finance a vehicle purchase. The transaction is complete once the check is given to the dealer.

Advantages

• You do not make any long-term payments to a lender.
• You take clear title and possession of the car immediately.

Disadvantages

• Making a purchase outright restricts your ability to use your money for other purposes.
• You will make a large capital outlay that is equal to the purchase price of the car.

You may choose to apply for a loan in order to finance the purchase of a car. This option allows a smaller initial out-of-pocket cost to you than paying cash.

Advantages

• Your money may be used for other purposes once you make the initial monthly installment payment.
• You may refinance your loan at any time when interest rates are lower, which will save you money.

Disadvantages

• Over time, the sum of payments made on the loan exceeds the purchase price for the vehicle. This is due to the effect time has on the value of money.
• Your credit rating determines your loan rates. Lower credit ratings result in loan rates that are greater than those for people with higher credit ratings are.

Taking a lease option may be a good middle choice for many between purchasing the car with cash and taking out a loan. Applying for a lease involves a credit application. The vehicle under a lease arrangement is often held for a shorter period than owning the car, usually no more than 60 months or 5 years.

Advantages

• You are not locked into a long-term purchase commitment.
• You are free to trade the car in for a newer vehicle at the end of the lease commitment.

Disadvantages

• You will be charged a flat rate for miles that you drive that are over your annual allotment.
• You will have to meet more stringent credit requirements to qualify for a lease since the vehicle is held for a shorter period.

You should choose the financing option based on your individual situation. If you are not concerned with the capital loss resulting from an outright purchase, paying cash makes sense. Financing is a good option if your credit is good and you wish to pay on an installment basis. If you are looking to keep the vehicle for a short period, leasing is the right option.