Paying Cash vs Financing a Car
Buying a car is one of the biggest and most exciting purchases you’ll ever make. You no doubt spend time researching what’s available. You look at brochures and websites, read reviews and think carefully about the model and options that are the right fit for you.
You should think just as carefully about the best way to pay for your new car.
Even if you can pay cash, it is not always the sensible choice. Of course, for many of us, handing over that much cash just isn’t realistic.
In this guide, we will discuss a range of very good reasons to consider financing your car purchase. With this information, you’ll be in a better position to make the right decision for you.
How to pay for a car
Whether buying new or used, from a dealer or a private seller, you will need to decide between paying cash or using finance for your purchase.
With cash, you won’t have to worry about future repayments or go through the process of obtaining a loan. Paying cash has the obvious benefit of not having to pay interest and set up costs of a car loan. If you have plenty of cash and no better use for it, then it may be your preferred option. You can provide a bank cheque or transfer the money into the seller’s bank account. Don’t take the risk of paying with a stack of $100 notes.
To negotiate the best deal, don’t let the dealer know you’re cashed up until you have agreed the price.
If you don’t already have the cash, a savings goals calculator will tell you how long it will take to save the money you need. Consider these scenarios:
- Price: $14,000. Current savings: $2000. Spare money you can save each month: $400. Interest rate: 2%.
It will take you 2 years and 6 months before you can buy the car.
- Price: $28,000. Current savings: $5000. Spare money you can save each month: $500. Interest rate: 2%.
It will take you 4 years and 8 months before you can buy the car.
- Price: $60,000. Current savings: $10,000. Spare money you can save each month: $1500. Interest rate: 2%.
It will take you 2 years and 9 months before you can buy the car.
Also factor in how much money you will spend on repairing your ageing car, or using taxis or Ubers in the meantime. You can’t avoid those expenses while you try to save.
If you do proceed with cash, make sure you have paid for your insurance cover and that you take legal possession of the car when you hand over the money, particularly if you are dealing with a private seller.
If you find yourself compromising on the safety, performance or suitability of the car just so you can pay with cash, then financing may be the wiser choice.
If you know you’ll be scrimping and saving for months or years to get the money together just so you can buy it with cash, then at least have a good look at your financing options.
Financing is the only choice if you need the car now, but don’t have enough savings. There will be a loan application process, interest and some upfront fees.
With financing, you will be able to enjoy immediate ownership of the car and spread the purchase costs over a more manageable 3 to 7 years.
Financing is also often the preferred choice even if you could theoretically pay cash:
- It lets you keep your cash for other expenses — you need to consider what shape your finances will be in after making a cash purchase.
- It lets you invest cash and earn a return rather than have it tied up in a depreciating asset.
- If you are buying for business purposes, there’s substantial tax and cash flow benefits.
What about repayments?
Today’s low interest rates have also helped to sway the balance in favour of financing. Car finance is more affordable than ever before. With a loan, you can buy the car now and choose a loan period to ensure your repayments are comfortable.
If you want, you can choose fixed repayments. You could also choose to structure your loan so you make low repayments now, but pay a lump-sum in a few years’ time to finish the loan.
What do most people do?
In the end, most Australians decide to finance the purchase of their new car.
How to pay for a car at a dealership
If you’re buying a new car, then buying from a dealer is really your only choice. They will generally handle stamp duty and registration for you. Buying a new car also entitles you to consumer guarantee rights that provide you with peace of mind.
If you’re buying a used car, you can either purchase from a Dealer or a private seller (e.g. on CarSales). Private sales are often cheaper than Dealers. Dealers provide a short warranty on used sales, but private sellers don’t (you can buy one of these through a broker for peace of mind). If you’re buying a second-hand car, get an independent mechanical check and check on the Personal Property Securities Register that there’s no money still owing on it.
Generally, it makes no difference to the seller whether you hand over your own cash or they receive the funds from your finance provider. Either way, they get the money.
There’s one important exception though.
Let’s say you’ve decided to buy from a dealer. You may be surprised just how keen the dealer is to sign you up to their finance offer!
That’s because dealers have an exclusive business arrangement with one finance provider and receive a commission whenever they sign someone up. They also usually push add-on repayment insurance — they get 20% commission on that as well.
When you’re offered dealer finance, just say ‘No’! It’s poor value for money.
Best way to buy a new car
When you are ready to buy, you will get the best deal by having your finances ready to go.
By obtaining a loan pre-approval:
- you can skip the pressure to take out dealer finance.
- you know you can afford the model you are looking at.
- the salesperson knows you are serious, so they will try harder to make a deal.
The Federal Government’s car loan advice says that it’s important to look at loans before you go to a dealership. It says choosing the right loan can save you thousands of dollars in wasted fees and interest payments.
It wouldn’t make sense to take out a loan that isn’t a great deal, which you can find by comparing many lenders. We’ll look at your options at the end of this guide and talk about how a car finance broker can help.
Should I finance a car even if I can pay cash?
Paying cash, the big benefit is you don’t have to bother with a loan application or pay any interest costs. If you have excess cash, then those are certainly important considerations.
If you are buying a motor vehicle for business purposes, then talk to your accountant or tax adviser because you will usually enjoy tax and cash flow benefits by using a loan instead.
If you’re buying a car for your own personal use, ask yourself whether the amount of cash you have on hand is influencing your choice. If so, stop and think whether cash is really the sensible choice. Are you buying what you need or are your current savings dictating your decisions?
Disadvantages of buying a car with cash
When deciding on what to spend, it’s important to think beyond just the drive-away price. Spending a bit more upfront can save you a lot more in the long run by helping reduce or avoid expensive maintenance and repairs.
Are you making compromises?
It might be the difference between:
- a new car or a used car.
- a used car with low kilometres or one with high kilometres.
- a used car with a warranty or one without.
- a car with all the features — including safety features — you want or one that is just near enough.
Think about what you may need to compromise to buy a car with cash. Some of the compromises can prove costly in the long term. The peace of mind that comes with a better car is hard to put a price on.
The money you spend keeping your old car running while you save up can quickly outrun the interest costs of a loan.
How is your cash position after the purchase?
Think about your position once you hand over the cash:
- Will you still have enough cash to meet your daily expenses or will you start building up a high-interest credit card debt?
- Can you cover any upcoming bills, like electricity, school fees or special events?
- Will you have to cut back on your lifestyle — going out to dinner, buying new clothes or weekends away?
- Will you still have a safety net for emergencies, like if your fridge breaks down?
- Can you meet the ongoing costs of enjoying your new car — petrol, accessories, washing, maintenance and servicing?
Cash you spend on a car is cash you don’t have for other needs.
Is it better to pay cash or finance a vehicle?
This decision depends on your individual circumstances. Only you can decide whether a cash purchase or finance is the best option for you.
- If you have ample money, then you can just pay cash and forget about it.
- In some circumstances, such as a motor vehicle for business use, there can be tax and cash flow benefits to taking out a loan or lease.
- If you need to spend months or years saving to pay cash, then finance is a way you can get the car you need or want now.
Best way to pay for a car
Once you’ve considered everything we’ve discussed here, if you still think cash is best for you, go ahead. You won’t have any repayments and you’ll pay no interest.
If you’ve decided finance is best, you will need to work out the finance option that provides you with the most benefits.
There’s a lot of lenders and a lot of different finance products. The Federal Government’s car loan advice suggests you find out and compare:
- the interest rate,
- application fees,
- service fees,
- missed payment fees,
- other fees,
- the ability to repay ahead of schedule with penalty,
- the loan term, and
- specific conditions attached to approving the loan.
Don’t be scared off.
A car finance broker can help you make sense of the options.
A car finance broker works as an agent for you as the buyer. On your behalf, they will:
- work through all the competing options.
They will compare terms and conditions, upfront and ongoing costs and a range of other relevant considerations to find you a great finance deal for your individual circumstances.
- help you through the application process.
Because they are specialists, car finance brokers have a lot of information about what is available, understand and can explain what the legal terms and conditions actually mean for you, and can quickly shortlist the best options.
- provide you access to the most competitive finance deals.
Brokers are in the best position to obtain good deals from lenders. They can access wholesale rates and lenders have to compete for their business. A good car finance broker will get you a better deal than dealer finance and a better deal than you can obtain by yourself.
If you are financing your new car purchase, using a car finance broker can help save you a lot of time and, by finding the most suitable product, they will save you money too.
How we can help
If you’re looking to buy a new or used car and you need finance, talk to our expert brokers at Auto Car Loans. We’ll take the time to understand your situation before finding you a great deal.
We arrange vehicle finance for a living from a panel of over 50 lenders. We work for our clients, not for lenders.
Get in touch with one of our experienced vehicle finance brokers today by calling 1300 301 051 during business hours.
We’d love to hear from you and we’d be happy to answer any questions you have.
DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.