The majority of people I know don’t even consider paying cash for a vehicle, they only consider how much their monthly payment will be. In fact, many people don’t even know how much they pay for their vehicle, only what their monthly payment is. In the next couple paragraphs I am going to tell you why I believe most people would be better off paying cash instead of getting loans.
First lets address the benefits of paying cash for cars.
- No loan therefore no interest cost
- Most people will probably buy a cheaper car if they aren’t getting a loan.
Looking at number one is very simple – no loan equals no interest cost. I can hear the objections already – but I got a loan for 0% interest! True, those loans have been very common the last few years, however, you normally have the option of getting a rebate in the neighborhood of $3,000 or 0% interest. So there normally IS a cost for the 0% loan. Also, I have seen many dealerships advertising loans for seven years! This is an obvious no no due to the fact that by the time you are ready for a new vehicle you will likely be upside down in your current vehicle. While financing a car is always an option PLEASE do not finance a vehicle for more than 5 years.
Lets get to number two and the real reason paying cash can benefit you. Has this scenario ever happened to you?
You go car shopping one day with a set dollar amount in mind that you want to spend. However, after looking around the lot you find “the car” and it happens to be more than what you intended to spend. After talking to one of the lovely salesman at the dealership you are informed that this car is only $100 more a month and voila, you have a new car with a higher payment than what you wanted! BUT, it is what you always wanted and it rides like a dream!
Most of us have been there at one time or another. If we change the above scenario and you saved money ahead of time vs. financing the car things would be different. Here are the differences when you have money saved for a car purchase.
- The first is that you don’t have any more money so you can’t buy a more expensive car. Pretty simple right?!
- The second is letting loose of 10-30k at one time is hard to do. Have you ever tried writing a check for $20,000? Its kind of hard to do and really makes you think twice before signing for a new car. I have seen numerous people buy 40-60k cars but never one that pays cash.
- Some people function better when they have a goal to hit. If you really want a car you are probably going to save a lot of money to purchase the car as soon as you can. This may give you enough incentive to forego going out to eat, an extra night in a hotel, or even calling the cable company to try and lower your bill (may the force be with you when talking to Comcast and Directv!).
This isn’t just a theory it is based on observations of people and their finances over the past 15 plus years in the industry. Looking at those 15 years of observations I have noticed that people paying cash for their vehicle tend to make smarter financial decisions. Of course there are always exceptions but I believe this is a practice that many people can benefit from.