Should You Purchase A Car, Either With Cash Or A Loan?
Category: Auto Loan
A car is perhaps one of the biggest purchases that you are likely to make. Just picked out your dream car? You likely still have one last choice to make. Should you buy a car through loan or with your own funds? However, don’t let the bliss of having your own set of wheels obstruct your way of making good financial decisions. Before you go ahead, it is mandatory to conclude whether you can afford a car. If you have the cash, is it better using it to buy the car? Or is it wise to use the loan track?
Set up your budget
The strongest argument for buying is you’ll own the car right away or when the loan is paid off. That means you will have a valuable asset you could later sell. First, keep the budget comprise all the costs involved in owning a car. Besides taking everything in mind of the car you desire to buy, include the cost of registration, maintenance, petrol, repair, or other expenses. Having recognized the budget, decide whether it would be more profitable to buy in hard cash or take a loan to own your car.
Things to know: before buying a car
To conceptualize whether to purchase with own funds or loan funds, you require comparing the post-tax return on your investment with the cost of the loan. If the return on investment is higher, it is wise to lend to buy the car, and vice- versa.
For instance, you can invest your funds in a debt mutual fund that is likely to give an average of 11% returns in the past. If you are investing in this plan and wait for at least a year, you can strategize to earn about 10% post-tax returns. As if the cost of car loan is lower than this, it could be sensible to invest your own funds and borrow to buy the car. However, it’s quite alarming. Investing comes with its own risks. There are conditions of bearing losses or lower profits than assumed. While making the decision, be sure that you are ready to take this risk.
The benefit of a car loan is that you can get a car without the need to pay its full amount, upfront. Although paying in cash means no interest charges, not many of us can afford to do so. Car loans allow us to pay for a vehicle we would not otherwise have funds for.
So, any bank or financial institution lends you money to buy a car, and in return you have to make your repayments on time.
While auto loan is a great way to obtain a car without having the need to pay it in full, the amount of interest you pay can amount to a large sum, equal to a big proportion of the car’s actual purchase price.
In car loan, you are practically renting the car and the ownership still remains to the bank or the lending agency. The car is not technically yours until you have fully paid the car’s amount.
You also run the risk of getting your car repossessed by the bank if you miss out on at least three consecutive payments. In case this happens, you are required to pay the bank the full outstanding fee plus any repossess fee.