Buying A Car With Cash Vs Auto Loan: Which Is Better?

When The Ides of March sang “I’m your vehicle; I’ll take you anywhere you want to go,” they were definitely not referring to YOUR car, which really doesn’t take you much of anywhere anymore.  There certainly comes a time in the life of every vehicle when all indications point to the urgent need for a replacement set of wheels so that you can put your old hoopty that spends more time in the shop than it spends on the road out of is misery.  But should you finance the cost of a new car with a loan or settle for a used car for which you can afford to pay cash? The answer depends on several factors, not the least of which is your budget.

Why You Should Purchase a Car Upfront With Cash

Before the housing bubble burst, the prevailing wisdom stated that property values had nowhere to go but up. As a result, purchasing a home represented a wise investment. Of course, the collapse of the housing market disproved this truism once and for all.

This truism has never applied to cars. In fact, it is often said that the value of a car drops significantly the minute you drive it off the lot.  It is almost a given that you will eventually be upside down on a car loan, unless you make a large down payment and take a loan with a very short term.

In fact, car loans possess the worst qualities of credit cards and mortgages. Car loans resemble credit card debt more than student loans or mortgages in that neither your payments nor the interest are tax deductible. But car loans are also like mortgages in that the lender can and will repossess your vehicle if you fall behind on your payments.

By contrast, when you pay cash for a car, the car is yours, free and clear. Unless you use the car as collateral for another loan or line of credit, or declare Chapter 7 bankruptcy, there are very few legal means for anyone to take the car away from you. And unlike a leased car, you can paint your fully-paid-for car any color you like, completely redo the interior or install a stereo system where your spare tire would ordinarily be stored.

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Why You Should Take Out a Loan for a Car

Given these factors, it would seem that it never makes sense to take out a loan for a car, but this is not the case. There are actually two instances where it makes sense to finance the purchase of a car: when you are financing a new (or newer used) car which you intend to keep for several years or when you are purchasing an antique, classic or collector-worthy car.  Purchasing a new car and essentially driving it into the ground allows you to extract the maximum value for your expenditure. And many classic or collector cars defy the common wisdom and actually DO appreciate in value.

By allowing you to make payments over time, car loans allow you to move up to a car with the latest features much sooner than you could afford such a car by paying cash. You may recall that one of the main purposes behind the “Cash for Clunkers” program was to get obsolete gas guzzlers off the road in favor of fuel efficient newer models. New cars also feature more safety and other innovations than all but the newest used cars.

A compelling reason for many new car buyers is that you get to choose the features you want, right down to the color of the paint job. Of course, there is also that wonderful new car smell. And don’t forget the warranty that all new cars (and newer used cars) carry, which is a significant advantage in its own right.

Making a Final Decision

If your heart is set on obtaining a certain make and model car with a specific list of features, you will almost certainly be in the market for a new car and a new car loan. If you can afford a decent down payment and the monthly payments do not impose a financial strain, go for it. Just know that you are not making an investment, but indulging a desire, which is fine if you can afford it. On the other hand, if your budget is tight, or if your job situation is marginal, taking a loan for a car is a risk you should seriously reconsider. If you absolutely need a car, shop for the best used model car that you can afford – and pay cash. Your budget will thank you.

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