So you’ve just graduated from college and you’re ready for a new car to transport you through your new life. Maybe you’re still holding on to your old beater from high school or maybe this is your first time shopping for a car. Regardless, it’s good to know your options for how you’ll pay for your new wheels.
Here are three different car financing options for college grads.
Taking out a loan might be an attractive car financing option for taking home a new car, but if you’re coming out of college with a pile of student loan debt, do you really want to add a car loan to that? A monthly car payment can be a drag on your budget and if your down payment isn’t big enough, it could mean being upside down on your car for a while (meaning you owe more on it than it’s worth).
Another thing you need to think about is interest. Let’s say you take out a 60-month loan with an interest rate of 4.25%. If you borrow $25,000 for a car loan with those numbers, you end up paying $2,794 on top of the principal in interest just for borrowing the money. Those numbers can get uglier if your credit isn’t very good. If that’s worth it to you for the car you want, then go for the loan, but it’s something to keep in mind when considering your options for financing your next car.
If you like the idea of a new car, but don’t like the idea of adding to your debt, then leasing is one alternative to taking out a loan for your next car. With a lease, you make a down payment and pay a monthly payment to drive a new car for a set amount of time that you agree upon with the dealer. With a lease, there are constraints on how many miles you can put on the car per year, which obviously puts limitations on how far you can drive it and you’ll be charged more if you go over those miles. At the end of a lease, you have the option to buy the car if you’d like to keep it. If you decide not to buy it, you just made a bunch of payments with nothing to show for it and the dealer will likely turn it around and sell it as a certified pre-owned car.
Leasing has some nice perks, most notably the ability to drive a nice new car with a warranty and a reasonable monthly payment, often with basic maintenance covered. However, to put it bluntly, leasing is the most expensive way to operate a vehicle. Basically what you’re doing with a lease is paying for the depreciation of the car plus a profit for the manufacturer you’re leasing from without actually owning the vehicle. And even though it technically isn’t a loan meaning there’s technically no interest, there’s still what’s called a "cost of capital" that is factored into the monthly lease payment. It’s a great deal for the car manufacturer and a not-so-great deal for you.
No matter what stage of life you’re in, cold hard cash is a fantastic way to buy a car. When you own your car free and clear with the title in your hand, you don’t have to worry about monthly payments and you pay absolutely nothing in interest. Have a sub-par credit score? Don’t fret, because it’s not an issue. Buying a car with cash doesn’t require a credit score at all. The driver’s seat is a little more comfortable in a car that you actually own. Even just thinking about not having a car payment feels pretty good, doesn’t it?
Since your best wealth-building tool is your income, you should think twice before letting go of a chunk of your income every month in the form of a car payment. When you own a car that you paid for with cash and you’re free of payments and interest, you can get those nasty student loans paid off much sooner. Even if you’ve graduated with no debt, owning a car with no payments makes it easier to save up a fat stack of cash for a much nicer car down the road as your income grows.
Of course, the big downside is actually coming up with the cash to buy a car. But the good news is we live in a very good time to be shopping for an affordable car that doesn’t require a lot of cash to buy without taking on debt. We’ve published several lists about great used cars, trucks and SUVs you can get for less than $5,000 and many of them are nicer and more modern than you might expect. Saving up $5,000 is a lot easier to do when you don’t have a car payment as a drag on your budget.
So, if you really want a new car right now, taking out a loan or signing up for a lease are good options for getting one, but come with financial baggage. If you want to get out of debt and build wealth, buying a car with cash is the way to go. Find a New Car for sale or Find a CPO Car for sale or Find a Used Car for sale