Paying Cash or Financing a New Car?

If you’re in the market for a new car, don’t wait until you’re on the lot to think about how you’re going to pay for it.

If financing your new vehicle is the path you plan on taking, you can save a lot of money by leveraging competing lenders, making a down payment, and keeping your spending within a range that you can truly afford. There’s a reason car salespeople have historically had the reputation they do, they’re used to being in high-pressure situations while talking about money. The average customer, however, has pretty limited knowledge when it comes to how you can finance your car and remain within your monthly budget. I have read up on the best & time-tested steps to save you a ton of money by the time you drive your new car off the lot. 

The first thing you should absolutely do is check your most up to date credit score before you head out to look at cars. Car dealerships often advertise that they offer stellar interest rates for their new cars, sometimes even offering 0%. What you don’t see in that offer is the fine print, where it might say this deal is reserved for those who have the very best credit score, often 750 or above. Even if you don’t have a great score, they will still offer you a loan, but it will cost you in interest. 

If you are one of the 54% of Americans who don’t have a credit score above 750, get financing quotes before you even window shop for a new car. Rates available from online lenders, your local credit union or your financial institution are more likely to offer a more competitive rate than the dealer will. 

After you know your credit score and where you will borrow the cash from, you need to think about how long it takes you to repay that loan. Dealers and lenders will offer you things like low monthly payments, zero down, or a 5-6 year repayment period. These are all offered for a variety of reasons, none very beneficial to the consumer. The longer you take to repay a car loan, the more interest you pay. So even if they take your monthly payment down to $300.00 from $400.00, you’re not getting any money taken off the price of the car, you’re actually just paying them in more interest due to paying on the loan for longer. 

Now you know your credit score, you have your lender and the terms of the repayment plan, and you're all of the sudden offered “zero down”. This is a no from me. Always put something down, preferably at least 20% but anything is better than nothing. Putting a down payment on your loan can reduce your principal and thus the total amount of interest you will repay. 

At this point in the interaction, they may try and talk with you about including sales tax, fees and any extras to the car. Anything added on like this, should be paid for in cash and cash alone. That $17.00 a month extra for a larger moonroof can end up actually costing you over $3000.00 once the loan has been repaid. 

Lastly, make sure you are buying a car you can actually afford. There is a lot of pressure on people to have the nicest cars with the most updated accessories. But a car is not an investment. It’s long been known that cars depreciate as soon as they drive off of the lot. Your auto loan should be there to help you purchase a car that you can afford, not one that you can’t afford. 

If you have the cash available and you don’t have a near perfect credit score, using that cash could be the best way to purchase your new vehicle. Talk with a financial advisor who can go over your investment portfolio and interest rates with you. 

If you do end up financing, and your credit score is below 750, do your homework. Look for rates and lenders and make sure your salesperson understands your boundaries and where you’re willing to bend. And remember, just because you CAN afford something, it doesn’t always mean you should.

-Sylvia McCormick Burns (Co-founder Oakview Wealth Solutions)