When Is It Better to Finance a Car Over Paying Cash?

When it comes to buying a car, it might seem like paying cash over financing is the better way to go. After all, you won’t have to worry about paying any monthly payments and, best of all, you won’t be paying more for the car via interest. However, there are some occasions when it’s actually better to finance a car than pay cash for it.

Buying a car with cash can deplete your savings

Ford dealership front
Ford vehicles sit on the lot of a new car dealership. | (Photo by Scott Olson/Getty Images)

It might seem like paying cash for a car is a no-brainer considering you won’t have to deal with interest, but it depends on how much you have saved up. If you’re planning to buy a $10,000 car and you have $12,000 in the bank, for example, then you might be better off paying a large down payment and financing the rest instead. Credit Karma notes that it might make more sense to keep some of your savings in case of emergencies or you can invest it and yield a better return in the future.

A low auto loan interest rate can actually work in your favor

An Anchor Savings Bank with a car loans sign window
An Anchor Savings Bank car loans sign | Barbara Alper/Getty Images

And while the interest charge and monthly payments can deter you from taking out a loan, those two factors can actually work in your favor. According to Money Under 30, if an auto loan interest rate is under 1.99%, then it’s worth financing a car. The thought process here is that the amount of interest the auto loan will accrue is less than the amount of interest that your money will earn if you invest it instead.

However, finding a low 1.99% interest rate is rare. According to Bankrate.com, the current average interest rate for a new car loan is 3.24% and it’s 4.08% for the average used car loan. Those rates aren’t too bad, but keep in mind that those rates are reserved for Tier 1 borrowers with a 720 credit score and above.

The lower your credit score rating, the higher the interest rate. If the interest rate is too high, then that could negate the benefits of financing the car and it would be better to pay cash instead.

Always shop around for the best financing rate

Car signs Lease or Buy.
Car signs Lease or Buy. | (Photo by David Cooper/Toronto Star via Getty Images)

If you decide that financing a car is the better option for you, then be sure to shop around for the best rate possible. It’s a good idea to check with your personal bank or credit union first as they typically have lower rates than what the dealership can find for you. However, if the car that you’re buying has a special financing rate (0.9 or 1.9%) from the manufacturer’s financial institution, then that would be the better way to go.

Financing a car shouldn’t necessarily be looked at as an evil undertaking due to the interest rates and monthly payments. Instead, financing can be viewed as a way to spread out the cost of the car over time, which can allow you to save a lot of the money that you have in the bank and accrue more interest during the time you get to enjoy your car. With a lower interest rate, financing a car can, in some ways, be a win-win situation.

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