If you are in need of a new car and you’re debating whether to use a loan or to pay cash, you should consider your attitude toward debt and your financial circumstances and ask yourself the following questions.
- Have you saved up the cash? If you haven’t, can you wait until you do have the savings to buy the car, or do you need a car right away?
- If you have cash, is buying a car (a depreciating asset) the best use of your money? Or might it be better to get a car loan and use the cash for, say, a home remodel that would increase your home’s value?
- Do you take pride in not incurring debt and living within your means, or do you feel comfortable with a certain level of debt?
- How much debt do you have already? Can you afford to add a car payment to your pile of monthly bills?
- How expensive a car are you contemplating? What would the monthly payment be? A car loan might mean you need to come up with $200 a month, or $800, big difference. Use online loan calculators to get a sense of what you’d likely pay if you financed the car.
- Do you have a good credit rating? It could help you improve your credit, or establish good credit, to get a loan and show a track record of making on-time loan payments.
One important factor to consider: When interest rates are low, automakers sometimes sponsor zero-interest car loan deals. If you have at least some of the cash and want to build your credit rating, the best course of action may be to sock the money away in an interest-bearing savings account and get a zero-interest loan.
Next, set up the loan so it will be automatically deducted from the account where you’ve placed the money. You hang on to your cash longer and earn interest on it, while slowly paying off the car loan. You’re paying nothing extra to string out your payments over several years rather than paying upfront. And the auto-deduct feature means you won’t miss any payments and risk damaging your credit.
If you don’t qualify for a no-interest loan, you may still be able to get a very low rate, which could help keep your payment low and make financing the purchase an attractive option.
Business reporter Carol Ticecontributes to several national and regional business publications.