Auto Loans or Cash?
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by: laurawilder
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The most important thing you should do to prepare to purchase a new or used car is examine your finances. Before you even head to the car dealerships to start test driving cars, you should have a handle on how much you can afford to spend, regardless if you plan to pay cash or apply for auto loans. There are advantages and disadvantages to both paying cash and financing, so you will need to determine what is best for your financial situation.
Buying a car outright is much less complicated than taking on auto loans. Paying cash up front means you will have zero financing costs, zero monthly payments, zero credit risk, and no concerns about owing more than the car is worth as it depreciates. As a bonus, if you pay cash for a car, you will likely not get in over your head financially. You own that car. The title will be yours.
Before you decide how much cash you want to spend on the car, however, you should ask yourself what you are sacrificing in order to purchase that car with cash. Maybe you need to pay for new storm windows, so should buy a used car. Or perhaps it would be more advantageous to pay off your school loan in lieu of a new ride. For most car buyers who can afford to pay cash, they do not have enough cash liquid. They will likely take money out of an investment fund, which may incur some fees. Another consideration is simply that car dealerships are giving out some amazingly low rates on auto loans right now, which might mean your cash would pay better dividends invested elsewhere. The bottom line, though, is that cash is cash. You will not take on debt to pay for that car and it will be yours the moment you drive it off the lot.
In examining the options offered by various auto loans, the most important thing to know is what you can afford. By looking at your overall spending each month, you can develop a budget. Start with your overall take home monthly salary. Then sum up all your mandatory expenses, such as mortgage payments or rent, student loan payments, utility bills and grocery bills. Deduct those mandatory expenses from your income. Deduct your optional expenses next (pizza money, pedicures, movie tickets, golf membership, etc.) It is wise to also subtract what you currently or would like to save or invest each month. Whatever you have left is what your budget can handle for a car payment. Do not forget that you are responsible for additional expenses such as insurance, licensing, gas, maintenance, parking fees, registration and a down payment to kick the loan off. You can role play with a cheaper or more expensive car and see what you are comfortable with. Before you sign paperwork for any auto loans, make sure you consider everything in your budget carefully.
Whether you plan to apply for auto loans or pay cash, know the maximum amount you can spend before you begin to look at cars. Stay firm on that limit. Put it on a yellow sticky and put it in your wallet. That guy on the car lot will always try to sell you a fancier model than you planned on. You are responsible for making those payments, no matter how great the deal may seem at the time. Be strong and protect your finances by knowing what you can and want to spend.
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