When one wants to buy a car there are two options they have. They either pay for it in cash or else they can have it auto-financed. Both have their advantages as well as disadvantages. However, before understanding the advantages and disadvantages of each here are the options explained:
Cash for cars versus auto financing
Buying in cash means that the person pays the money then picks up the car. The other option is to use an auto financing. In this case one puts in some amount called a down payment on the car and then pays the balance in installments. In this option, the person does not need to wait till the last payment to take home the car.
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Disadvantages of cash for cars
The disadvantage of cash for cars is:
a) If one wants to only use the cash they have, due to budget restrictions, they will need to settle for a less expensive model of a car. However, if the person does not mind auto finance, they can use the cash towards the down payment, and the horizon for the models they can then purchase then increases manifold times.
b) One will end up losing only a little bit due to the financing. However, they get to keep their cash either for reserves or for other projects they need to take up or for investments they need to make. One can even invest in projects which help them earn a higher rate of interest than the interest that they are being charged for the car loan which they have taken.
c) When one takes a loan for a car or for other purposes, they build up a rapport with the borrower and when they require a loan for some other purpose; they are able to get the loan easily.
d) When a person finances a car based on the installments paid, their frequency, their prepayment or the defaulting, the credit score of the individual is evaluated. So for someone who wants to build up a good credit score, they should take an auto loan and make timely payments of installments.
Advantages of cash for cars
- When one chooses cash for cars, there is no worry about the recurring payments. One is not tensed as to how they will manage to pay back the loan or the installments should they get laid off from their job or are not able to make regular payments in the future.
- One does not need to worry about the extra amount one will need to pay in terms of the interest or the fees they have to pay to the bank or the lenders in order to take the loan.
- If one has a bad credit rating there are chances that the loan will not be accepted or if it is, there will a higher rate of interest that is charged, to make up for the risk that the borrower takes, when lending to a person with bad credit.
- Cars also depreciate. Some models have higher depreciation rates than others, so when one takes a loan on a car, sometimes they may end up with an upside down loan where the cost of the loan is worth more than the value of the car. If one will want to trade their vehicle for another or sell their vehicle, it is beneficial not to go in for a loan but to pay it in cash.
Therefore, each of these – auto financing and cash for cars have their advantages as well as disadvantages. However, based on the user, they need to evaluate as to what is the best method for them.
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