Paying Cash vs Financing a Car

Buying a car is one of the biggest and most exciting purchases you’ll ever make. You no doubt spend time researching what’s available. You look at brochures and websites, read reviews and think carefully about the model and options that are the right fit for you.


You should think just as carefully about the best way to pay for your new car.



Even if you can pay cash, it is not always the sensible choice. Of course, for many of us, handing over that much cash just isn’t realistic.




In this guide, we will discuss a range of very good reasons to consider financing your car purchase. With this information, you’ll be in a better position to make the right decision for you.



How to pay for a car




Whether buying new or used, from a dealer or a private seller, you will need to decide between paying cash or using finance for your purchase.





Cash?

With cash, you won’t have to worry about future repayments or go through the process of obtaining a loan. Paying cash has the obvious benefit of not having to pay interest and set up costs of a car loan. If you have plenty of cash and no better use for it, then it may be your preferred option. You can provide a bank cheque or transfer the money into the seller’s bank account. Don’t take the risk of paying with a stack of $100 notes.




To negotiate the best deal, don’t let the dealer know you’re cashed up until you have agreed the price.





Saving up?




If you don’t already have the cash, a savings goals calculator will tell you how long it will take to save the money you need. Consider these scenarios:




It will take you 2 years and 9 months before you can buy the car.



Also factor in how much money you will spend on repairing your ageing car, or using taxis or Ubers in the meantime. You can’t avoid those expenses while you try to save.





Other considerations

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If you do proceed with cash, make sure you have paid for your insurance cover and that you take legal possession of the car when you hand over the money, particularly if you are dealing with a private seller.




If you find yourself compromising on the safety, performance or suitability of the car just so you can pay with cash, then financing may be the wiser choice.




If you know you’ll be scrimping and saving for months or years to get the money together just so you can buy it with cash, then at least have a good look at your financing options.




Financing?



Financing is the only choice if you need the car now, but don’t have enough savings. There will be a loan application process, interest and some upfront fees.




With financing, you will be able to enjoy immediate ownership of the car and spread the purchase costs over a more manageable 3 to 7 years.

Benefits




Financing is also often the preferred choice even if you could theoretically pay cash:




It lets you keep your cash for other expenses — you need to consider what shape your finances will be in after making a cash purchase.

It lets you invest cash and earn a return rather than have it tied up in a depreciating asset.

If you are buying for business purposes, there’s substantial tax and cash flow benefits.




What about repayments?




Today’s low interest rates have also helped to sway the balance in favour of financing. Car finance is more affordable than ever before. With a loan, you can buy the car now and choose a loan period to ensure your repayments are comfortable.

If you want, you can choose fixed repayments. You could also choose to structure your loan so you make low repayments now, but pay a lump-sum in a few years’ time to finish the loan.

What do most people do?




In the end, most Australians decide to finance the purchase of their new car.




How to pay for a car at a dealership




If you’re buying a new car, then buying from a dealer is really your only choice. They will generally handle stamp duty and registration for you. Buying a new car also entitles you to consumer guarantee rights that provide you with peace of mind.




If you’re buying a used car, you can either purchase from a Dealer or a private seller (e.g. on CarSales). Private sales are often cheaper than Dealers. Dealers provide a short warranty on used sales, but private sellers don’t (you can buy one of these through a broker for peace of mind). If you’re buying a second-hand car, get an independent mechanical check and check on the Personal Property Securities Register that there’s no money still owing on it.




Generally, it makes no difference to the seller whether you hand over your own cash or th