Now that you have a perfect car that fits your budget and needs, you may be wondering how to pay for it. Well, buying a car with cash has its benefits and drawbacks. So, before you spend chunks of your savings, be sure to find out if purchasing a vehicle with cash is right for you. You also need to secure that you are covered with an affordable insurance policy.
Below are the things you should consider before buying a car with cash.
Is it worth it to spend your savings to buy a car with cash?
If your answer is “Yes,” you better make sure that you are not thinking of spending your cash in the retirement account or into your hard-earned savings. Taking a small loan from your funds might leave you in a dilemma when the time comes that you needed that money. The trickier question to ask yourself is whether you should buy a car with cash.
Furthermore, if you are using your savings in buying a car with cash, make sure you have enough money left for unforeseen events in the future. According to financial advisors, people must have emergency savings to pay bills (rent, insurance, food, utilities) for at least two or three months in case of a job loss.
However, since extended periods of unemployment are common these days, financial advisors stated that you have at least nine months in savings. You should prepare for these emergency funds as you do not want to drain your savings fund if you are deciding to buy your car in cash. On the other hand, if you can comfortably draw cash using your emergency or savings funds for an extended period, you probably can afford to buy a car with cash.
Here are the pros and cons of buying a car using cash:
Cons: You will lose an investment opportunity, and you’ll decrease your savings for unforeseen events.
Pros: You’ll pay without interest, and you don’t have to worry about monthly payments.
Ask yourself about the Interest Rates.
Buying a car using cash depends on current interest rates. Now, if you already have enough money away from your savings, the next thing you should consider is if that money could be used elsewhere. For instance, if you have enough credit to earn a low-interest rate on a car loan, then you may do much better in getting a loan for the car and invest your cash in a financial product with a higher rate of interest.
Buyers that have the best credit scores can usually secure an auto loan of about 5% under the current market conditions. Now, if a car is approximately $15,000, you may invest that cash for a 6% or greater return than you would by saving few thousands of dollars on an interest payment. Nevertheless, buyers with poor or low credits may see an interest rate as high as 18%. In this case, the savings on interest can be substantial.
There are pros and cons associated with the high and low-interest rate. One of the pros of a low-interest rate is that, with low interest, you can leave your savings alone. Also, you can invest money elsewhere. On the other hand, there are cons of having a higher interest rate. One is that you will pay more for the car over the loan’s life span. The second is that your monthly payments will be higher.
Consider your Credit and Car
Another aspect you need to consider is your credit. Buyers that have short credit history may borrow rather than pay cash to establish credit. If you want to build a good credit history, one great way is to save beyond the life of the car. That way, you will be able to secure a low-interest rate on your future purchases. The pro of using credit is that you’ll build good credit if you are making payments on time. The second is that you’ll be able to take advantage of the zero-interest loan. On the other hand, the con is that you have to send monthly payments.
Aside from considering your credit, considering a car to buy should also be on the list. Buying a new car could give you fewer repairs and breakdowns. As well as that, you may be eligible for a zero-interest loan. However, a new car depreciates quickly. Also, if you finance the purchase, you’ll probably carry full insurance coverage.
After purchasing a car, auto insurance will also take effect. With that, you’ll carry a specific amount of coverage to legally drive your vehicle in your state. In finding coverage, an independent agent is one of your best way to source low rates and personalized service. Independent agents can also help you get the coverage you need easily and quickly.