Car Buying

Financing a Car: When Is Financing Better Than Paying With Cash?

RELATED READING
RESEARCH BY MAKE
Toyota cars, trucks and SUVs Ford cars, trucks and SUVs Honda cars, trucks and SUVs Chevrolet cars, trucks and SUVs Jeep cars, trucks and SUVs Nissan cars, trucks and SUVs Lexus cars, trucks and SUVs Volkswagen cars, trucks and SUVs BMW cars, trucks and SUVs
Acura cars, trucks and SUVs Alfa Romeo cars, trucks and SUVs AMC cars, trucks and SUVs Aston Martin cars, trucks and SUVs Audi cars, trucks and SUVs Bentley cars, trucks and SUVs BMW cars, trucks and SUVs Bugatti cars, trucks and SUVs Buick cars, trucks and SUVs Cadillac cars, trucks and SUVs Chevrolet cars, trucks and SUVs Chrysler cars, trucks and SUVs Daewoo cars, trucks and SUVs Datsun cars, trucks and SUVs DeLorean cars, trucks and SUVs Dodge cars, trucks and SUVs Eagle cars, trucks and SUVs Ferrari cars, trucks and SUVs FIAT cars, trucks and SUVs Fisker cars, trucks and SUVs Ford cars, trucks and SUVs Freightliner cars, trucks and SUVs Genesis cars, trucks and SUVs Geo cars, trucks and SUVs GMC cars, trucks and SUVs Honda cars, trucks and SUVs HUMMER cars, trucks and SUVs Hyundai cars, trucks and SUVs INFINITI cars, trucks and SUVs Isuzu cars, trucks and SUVs Jaguar cars, trucks and SUVs Jeep cars, trucks and SUVs Kia cars, trucks and SUVs Lamborghini cars, trucks and SUVs Land Rover cars, trucks and SUVs Lexus cars, trucks and SUVs Lincoln cars, trucks and SUVs Lotus cars, trucks and SUVs Maserati cars, trucks and SUVs Maybach cars, trucks and SUVs Mazda cars, trucks and SUVs McLaren cars, trucks and SUVs Mercedes-Benz cars, trucks and SUVs Mercury cars, trucks and SUVs MINI cars, trucks and SUVs Mitsubishi cars, trucks and SUVs Nissan cars, trucks and SUVs Oldsmobile cars, trucks and SUVs Plymouth cars, trucks and SUVs Pontiac cars, trucks and SUVs Porsche cars, trucks and SUVs RAM cars, trucks and SUVs Rolls-Royce cars, trucks and SUVs Saab cars, trucks and SUVs Saturn cars, trucks and SUVs Scion cars, trucks and SUVs smart cars, trucks and SUVs SRT cars, trucks and SUVs Subaru cars, trucks and SUVs Suzuki cars, trucks and SUVs Tesla cars, trucks and SUVs Toyota cars, trucks and SUVs Volkswagen cars, trucks and SUVs Volvo cars, trucks and SUVs Yugo cars, trucks and SUVs
RESEARCH BY STYLE
AWD/4WD
Commercial
Convertible
Coupe
Hatchback
Hybrid/Electric
Luxury
Sedan
SUV/Crossover
Truck
Van/Minivan
Wagon

author photo by Doug DeMuro April 2015

We hear it all the time: It's better to pay for something with cash than to borrow money to buy it. But are there circumstances when that isn't entirely true? We happen to think so, especially when it comes to financing a car.

Low Interest Rates

The primary situation in which you should finance rather than with cash comes when interest rates are especially low. In virtually every case where you're offered zero percent interest, for example, you should take it. In these cases, the bank or car company isn't charging you a thing for the privilege of spreading out your payments rather than paying entirely up front.

But zero percent interest isn't the only situation in which you might want to seriously consider financing. If you're given a rate as low as 1, 2, 3 or even 4 percent, you should think about financing your vehicle rather than paying with cash. There are a couple reasons for this: It allows you to keep around extra cash that would otherwise be tied up in your car, and you could instead invest the money and earn a high enough return to cancel out your interest payments.

As an example of our second point, consider this: If you put $5,000 down on a $30,000 car and pay 2 percent interest on $25,000 over the next 3 years, your total interest payments will equal just $710. However, if you invest that $25,000 and earn a conservative 5 percent annual return, you'll earn $1,250 in the first year alone. That's a far better place for your money than paying cash for a car.

Getting a Better Car

Sometimes there's another good reason for financing a car rather than buying it with cash: You can get more car for your money.

If you only have $5,000 to spend on a new car, for example, you can purchase a used vehicle for $5,000 in cash, but it will likely be an older car with higher miles and few modern gadgets or safety features. Use that money as a down payment, however, and your possibilities will increase. Suddenly, you'll be looking at cars that cost $10,000 or even $20,000, and you'll get more safety features, more equipment and better long-term reliability.

The next time someone tells you that you should try to pay for your car with cash rather than a loan, just remember: Sometimes, having a car payment can be a surprisingly smart financial decision.

This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
Financing a Car: When Is Financing Better Than Paying With Cash? - Autotrader