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Disadvantages to Paying Cash for a Car

by Autobytel Staff
October 1, 2009

If you are buying a car, you need to have some idea of the best way for you to pay for it. In many cases, the options are limited. However, some people put money aside or have enough from another source to pay cash for their vehicle. This is not usually for people who are buying their first car but more likely to be people in their middle to later adult years. Only because it takes time to save up the money required for new vehicles today. There are both advantages and disadvantages to paying cash up front for a new car today. The biggest advantage is, of course, that you might save money. If you are not financing your purchase then you will obviously save money on the financing charges. Another advantage is the sale is done and over and you don't have the inconvenience of keeping track of yet one more payment. The other factor involved in paying cash for a car, is that you now own the vehicle. If you finance your purchase, the bank or mortgage company actually owns the car until all the payments are made. Now let's look at the disadvantages of paying cash when buying a car. Some of these may surprise you. You don't want to pay for your car outright if it is better utilized elsewhere. If you are trying to buy a house, the money you would have paid cash for a car, may be the difference in being able to make the down payment required to buy a new house. Be smart. Cash is great but it's not always the answer. If you need to build credit, having a car loan, even for a short time period is a good way to build up your credit score. If you take the loan for only six months to a year, the financing costs are minimal and the benefits can be huge. You might be thinking that if you have the cash to pay for a car, you don't care about your credit. Many people can scrounge together the money from various sources to pay cash. However, just because they can doesn't mean they should. If you are borrowing money from your parents or siblings, consider asking them to co-sign instead. This will stop them from having any cash outlay and help you to build your credit. Another disadvantage is if you own your own business and use the vehicle for business purposes. You will be able to deduct much more if you lease. The interest paid on loans to purchase a car is not deductible. However, when you lease you can deduct depreciation as well as the financing costs. This is a good time to lease a vehicle and claim all your lease payments against the business. Many people do this with a business. It's smart use of money. If you lease your vehicle, you have minimal cash outlay, as many dealers will waive the down payment requirement. You will only need to come up with a couple of thousand dollars for fees, the first month's payment and your refundable security deposit. The sales tax is normally rolled into your monthly payment as well. If you buy a car, either cash or financed, then when you are ready to sell it, you have equity from the car to trade in or sell to get it back out. A lease is like a rental. You pay to use it but have nothing in the end. With financing, your purchase, as opposed to leasing or paying cash, you may have to put down 10% of the purchase price as a down payment and there is the added expense of sales tax. There are costs associated with this type of purchase, but or many this is the only option. Another thing to consider when looking at paying cash for your car is what that money could make you in an investment portfolio. Look at the interest rate you would be paying if your financed a car, consider the additional fees and then look at the rate of interest you would get on the money if you invested it. If you took out a car loan over 48 months and invested the same amount of money for 48 months, which is a better deal? Which gives you something at the end of the 48 months? If you only considering a $10,000 purchase, that has slightly less impact than if you are wanting to purchase a $50,000 vehicle. The real issue here is what works for you?


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