The benefits of financing a car may outweigh the benefits of buying with cash.
If you’re shopping for a new car, you may be wondering if it makes sense to pay cash. But even if you have the money at hand to buy a car outright, there are still advantages to taking out a loan. In fact, for most Americans, it’s almost never better to pay cash for a new car.
Build Your Credit History
Having no credit history is a major disadvantage whenever you seek approval for a loan or move into a new apartment. If you plan to buy a home with a mortgage or finance a car in the future, having a lengthy credit history can help you get approved and qualify for lower interest rates.
According to FICO Scores, the most widely used credit scores, 15% of your score is determined by the length of your credit history. Additionally, the most important factor is payment history, which accounts for 35%. This means that simply having credit and making payments on time can be responsible for half of your credit rating.
Financing a car and paying it off shows future lenders that you are a safe bet. By paying for a new car with cash, you miss out on a major opportunity to improve your credit score.
Expand Your Savings
It’s always a good idea to have enough savings to get you through a rough patch. According to savings expert Margarette Burnette, there’s no one-size-fits-all answer for how much money you should keep in the bank. However, “the standard recommendation is to have enough to cover three to six months’ worth of basic expenses,” she writes for NerdWallet. If buying a new car with cash would deplete your savings to the extent that you couldn’t cover at least three months of basic expenses, it makes more sense to finance.
Especially in an uncertain economy, you can never feel too comfortable with too little saved. Even if you feel comfortable letting go of the capital, investing it in stocks, mutual funds, or a retirement account can yield much bigger returns compared to avoiding the interest on a loan.
Don’t Limit Your Options
New cars are expensive, and buying one with cash can severely limit your options. If your liquidity isn’t sufficient to purchase the car, SUV, or truck that fits your needs, financing a loan can give you access to a wider selection of vehicles. But it isn’t just your vehicle options that are limited when paying cash.
“A brand will sometimes offer lower interest rates or even no interest at all on a new vehicle,” says Kelley Blue Book. “Dealers might offer significant rebates if the buyer finances the car through an institution tied to the automaker. Skipping this offer could be a missed opportunity.”
The biggest perk of buying a car with cash is avoiding the interest payments, but with many low-interest or even no-interest loans available, it makes more sense to finance in most situations.
Get Pre-approved Before You Buy
Get pre-approved for a loan before you set out to purchase your dream car. Contact a trusted Five Star Bank representative today or visit your local branch.
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