Should I Take on Auto Loans or Pay Cash
Posted 08/31/09
If you are in the market for a new car, your first step should be to carefully look at your budget. Before you even head to the car dealerships to start test driving cars, you should have a handle on how much you can afford to spend, regardless if you plan to pay cash or apply for auto loans. Once you know what you can afford, you can look at the pros and cons of paying for the car in cash or taking on an auto loan.Paying cash for your new car, rather than relying on auto loans, can be a very smart move, particularly if you have saved funds for the purchase. Paying cash up front means you will have zero financing costs, zero monthly payments, zero credit risk, and no concerns about owing more than the car is worth as it depreciates. You also will not buy more car than you can afford. You own that car. The title will be yours.
When you examine your budget before you purchase the car, take note of what you will have to give up to fork over that cash. Should you be buying a cheaper car to save for a new roof, for example? Or perhaps it would be more advantageous to pay off your school loan in lieu of a new ride. For most car buyers who can afford to pay cash, they do not have enough cash liquid. Instead, they have to cash out an investment or pull the money out of an account that may have a penalty. It is also possible that the cash you spend on that car could offer more investment opportunity elsewhere, particularly when you weigh it with some of the low rate auto loans dealerships are offering right now. The bottom line, though, is that cash is cash. You own the car and do not incur debt to anyone by paying cash.
If you are looking at auto loans, the vital first step is identifying you financial ceiling for monthly payments. By looking at your overall spending each month, you can develop a budget. Begin with what you bring home after taxes each month. Next, add up all your necessary spending (loans, electric bills, phone bills, tuition, etc.) Deduct those mandatory expenses from your income. Deduct your optional expenses next (pizza money, pedicures, movie tickets, golf membership, etc.) Make sure you also include the amount per month you presently or hope to set aside for savings and retirement. That remaining number is what you can afford on an auto loan payment, assuming there are no other big ticket items you plan to purchase within the time you anticipate having the auto loan. Keep in mind that you will need to make a down payment on the car, as well as pay for registration, inspection, license plates, fuel, upkeep and repairs. Most, if not all, of those expenses are dependent upon the type of vehicle you purchase and the purchase price. Thoroughly outline all the costs before you take on any auto loans.
Whether you plan to apply for auto loans or pay cash, know the maximum amount you can spend before you begin to look at cars. Do not veer from that course. Put it on a yellow sticky and put it in your wallet. That guy on the car lot will always try to sell you a fancier model than you planned on. The dealer will not pay your bills for you. Be strong and protect your finances by knowing what you can and want to spend.