Should I Finance or Pay Cash: Car Buying

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Even with poor credit.

By

Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


, Contributing Writer - November 24, 2020

If you have some cash in your pocket, it’s tempting to just pay for a car outright. There are definitely benefits paying for a vehicle in full with cash, but this option has its fair share of downsides – the same goes for financing. We explore the pros and cons of both car buying options.

Differences Between Financing and Paying Cash

When you finance a vehicle, you borrow the money from a lender. The lender pays for the car, then you pay back the loan in installments over a set period of time. Auto loans are typically between 48 and 84 months long. Each on-time payment you make can build a long-standing credit history that improves your credit score.

However, you don’t usually get to take on a car loan for free! Nearly every lender charges you interest, expressed in a percentage. Most auto loans use a simple interest formula, which means that your interest charges are accrued daily on top of your financed amount. Your interest rate is largely influenced by your credit score – the better your credit, the lower your interest rate typically is.

When you pay cash for a vehicle, you don’t have to worry about finding a lender or paying for interest charges. Paying for a car outright can mean big savings, however, you don’t get a chance to improve your credit score. If you ever plan on borrowing from a lender in the future, it’s worth it to consider where your credit stands. If you’re always paying cash for items, then your credit score could be suffering, and you may not be able to finance when you really need it.

Examining the Pros and Cons of Both Options

Pros of paying cash:

  • No monthly payment
  • No interest charges
  • Don’t need to find a lender
  • Determining your spending limit is easy

Cons of paying cash:

  • Spending cap may be low
  • Can’t build a credit history
  • Vehicle choice may be limited by your budget
  • Risk losing all of your savings

Pros of financing:

  • Chance to build credit history
  • May be able to finance a more expensive car
  • You can pay for the vehicle over time
  • May not have to deplete your savings

Cons of financing:

  • Paying for interest charges
  • Monthly payments
  • Need to find a lender that can approve you
  • Your credit score can determine your car buying power

Why Bad Credit Borrowers Should Consider Financing

If you already have a good credit score, then paying cash for a vehicle could be a good option. However, if you’ve never taken on a loan before or your credit score has seen better days, then financing a car could make the most financial sense for you in the long run.

Auto loans are a great way to build credit history. Remember that to build credit, you must take on credit! Having a better credit score improves your chances of getting approved for future car loans and other types of credit. This means you may qualify for lower interest rates, which saves you more money on big-ticket necessities in the future.

There are lenders willing to work with borrowers with less than perfect credit. Not every lender can help with tough credit circumstances, but the ones that can are called subprime lenders. They’re third-party lenders that are signed up with special finance dealerships.

Subprime lenders work with all sorts of bad credit scenarios, including past bankruptcies, both habitual and situational bad credit situations, and new borrowers with limited credit histories. Financing with a subprime lender can mean getting the vehicle you want, and boosting your credit score at the same time.

Finding an Auto Lender the Better Way!

Finding the right lender for your credit doesn’t have to be a hassle when you team up with us at CarsDirect. We’ve gathered a national network of dealers that are signed up with subprime lenders, and we want to look for one in your local area for free!

Complete our free auto loan request form, and we’ll get right to work on finding the lending resources you need.

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


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