Financing a Car – Is It Worth It?

When it comes to purchasing a new car, there are a lot of options. However, not all of these choices are necessarily right for everyone and every budget. Let’s look at the options and under which circumstances to use each. 

Option 1: Used with Cash

Ultimately, purchasing a car used, with cash, is the best way to purchase a car, regardless of your budget or income level. It is the best option financially and fiscally. Cars depreciate in value very quickly, and purchasing a brand new car on credit will cause you to get upside down within a few months. This is the best option in a perfect world. We do understand this is not always a feasible option for everyone. 

Option 2: Used, partially financed. 

The next best option to purchasing with all cash, is used, partially financed. Financing a vehicle is not ideal due the interest paid while paying off the loan. You end up paying more for the vehicle than it is worth in the long run. A $15,000 car can cost $20,000 after interest. And by the time it’s fully paid for, the car is worth less than it was purchased for. It doesn’t make sense. 

However, there are circumstances where partially financing a vehicle can work in your favor. For example, lower interest rate promotions or rebates for using dealer financing, and then paying off the loan early, can balance itself out. The best way to figure this out is knowing your budget, so you can know how quickly you would be able to pay off the loan. 

Then, use a simple calculator (Ramsey Solutions provides a great one that is very user friendly) – to determine how long it will take you to repay the loan, including interest saved. If the interest is less than the money received as a bonus for using credit, then you are in the clear! If not, you may need to re-evaluate the loan amount and the purchase. The most important thing to remember when using financing to purchase a car is you should aim to pay it off early. 

Option 3: Used, fully financed. 

Again, the best option is to purchase a used car with cash. But sometimes that is not an option, depending on certain financial circumstances. If you are in a situation where transportation is needed desperately and no savings, fully financing a vehicle is an option. But again, it must be an informed decision. Evaluating the interest rate, and the length of time it will take to repay it, should be a factor in the decision making process. 

In these circumstances especially, one should never purchase a brand new car with a loan. In times of distress, one is much more likely to be taken advantage of or experience buyers remorse. Instead, do your research and know what type of vehicle you want, and the price you should be paying for it. And most importantly, be willing to walk away if the price isn’t right for you. 

Other Options: STEER CLEAR!

There are several other options available when purchasing a car. However, they are not methods we would ever recommend to anyone. Purchasing a brand new car, using a loan is never a sound financial decision. The same applies for using a lease to purchase a car. Although appealing, leases are not a good option financially. You build no equity as you don’t own the vehicle nor are you paying off a balance to a lender. The fees are exorbitant if you go over mileage or wear & tear, and you are required to have a large sum of cash to purchase the vehicle after the lease expires. Again, as appealing as they are, with the flexibility to change cars every few years, they are not going to work out as a healthy choice for your budget. 

There we have it! Those are our recommendations for purchasing a vehicle. We are not experts, but these are the recommendations we have based on personal experience and coaching clients. What about you? Is there anything we missed? Or any experiences with car buying that you have to share? Let us know in the comments below.