If you have decided to buy a new car, you must be stuck between hard rock and deep blue sea by not being able to decide whether to buy a car outright or take out a loan. Well, you are actually very lucky if you have a sound financial condition. Most of the buyers have yet to have the option to pay for a car in cash.
When taking the opinion of others, you will find most are going with the cash payment. Many will say it makes sense to pay in cash when you can because this will help save a lot of money in interest.
Another reason to discourage debt is that you have already had a bad experience. Some people are in support of paying cash outright. According to them, debt is a better alternative than paying cash outright. This perception is generally common among investors.
You can get a lot of different suggestions from different people with different experiences. So, how will you be able to make a decision? The answer is you need to do the math on your own.
Evaluate your opportunity cost
Cash payment outweighs the advantages of an auto loan undoubtedly; however, not always. Whether you pay in cash or not, you will have to bear an opportunity cost. Before making a decision, you need to check if the benefits you drive are more than the opportunity cost.
For instance, if you do not have any plan to make a big purchase, a cash payment will save you a lot of money. However, if you are thinking of taking out a mortgage after a year or later and the cash you have you want to utilise as a down payment, it may be a logical idea to take out a car loan.
With the hefty deposit, you will be able to avail of a mortgage at lower interest rates, and by the time you will put in the application for it, you will have cleared one-third or half of the car debt.
In addition, if you have decided to invest in a project, including buy-to-let or commercial property, that is assumed to yield a good return, you can use that money for that project. Make sure that the return will be higher than the interest you pay on your debt.
Technically, these things are not as easy as they seem. The market price of a car is much lower than the cost of a house. You will end up juggling between two kinds of debts by ignoring cash payments.
Apart from the opportunity cost, you need to ensure your repaying capacity.
How good your credit score is
You might find that you should take out an auto loan, as the opportunity cost of paying the full money outright is much more than that. Do not jump the gum. The next thing to look at is your borrowing capacity.
Taking out a car loan means you are to pay interest over a period of time. You get the title after you make a full and final settlement, and by the time of the final payment, you have already paid a lot of money as interest.
For instance, you have taken out an auto loan worth €25,000 at 6% interest to be paid off within five years, with a monthly payment worth €483.32. After five years, you will have paid up to €3,999 as interest.
You will get the title of your car and then restart saving money for the down payment of a new car. This trend will keep on, and you will have paid much more money as interest in total. However, it is likely that you will buy a car in cash next time as the opportunity cost is not that high.
The idea of taking out an auto loan will work in your favour only if you have a good credit rating. Whether you opt for dealership finance or an auto loan from a direct lender, your credit score should be good to get attractive interest rates.
Although a couple of lenders provide the cheapest car loans for bad credit in Ireland, they will still likely be expensive. If your credit report is not stellar and you have the potential to pay for the car in cash, you should go for the latter.
Have you prepared for unforeseen expenses?
If you have decided to take out an auto loan, you should ensure that you will have an emergency cushion in case any unforeseen expenses crop up. Auto loans could sound like small loans, but they are not. Based on your financial condition, you may be tied with payments for a period of three or more years.
In the meantime, if you crop up a significant emergency, you should have funds to pay for it from your pocket. Although loans are the alternative, they will not work in your favor. Managing both loans could be extremely hard, especially if you need to apply for bad credit loans with instant decision in Ireland.
It does not allow the interpretation that this rule is not applicable when you pay for the car outright. Emergencies could surprise you at any time, so you should have a corpus to dip into so you do not have to rush to loans. If you really need to borrow some money, you can do it at quite affordable interest rates.
The bottom line
Whether you buy your car in cash or finance it, both have their own pros and cons. The opportunity cost could be high if you pay the whole money in cash. If you try to finance it, you will likely end up paying a lot of money as interest.
You should carefully assess your financial condition before coming down on one side of the fence or the other. If you cannot make a decision, you should try to consult a financial advisor. They would carefully assess your financial circumstances, prognosticate how it will be down the line, and then tell you the best decision.
Some people try to find a middle ground. They pay half of the payment in cash, and the half cost they finance with a loan. Since the loan size will not be too large, you will not end up paying a lot of interest in total. Further, you will be able to clear your debt quite soon.