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Finance vs Paying Upfront

Jun 3, 2022 | Finance Tips

The great thing about car finance is that you don’t have to save as much of your money to purchase a vehicle.

However, there are advantages and disadvantages that should be considered for using finance as well as paying for a car upfront. Ultimately, it comes down to what’s best for your own circumstances.

Which option is best for you?

When it comes down to buying a car, you have a big decision to make; get a car loan or pay for the car upfront. If you have the cash (or are willing to save up), it may seem like an easy choice to pay for it outright. But this isn’t always the case.
Spending your own money on purchasing a vehicle means the money is no longer available to use elsewhere. So it’s worth considering what you will be possibly giving up in order to pay for your car. The thing you could be giving up is called the opportunity cost.
For example, let’s say you’ve been saving your money for the last four years to go on an overseas holiday. For whatever reason, you suddenly need to purchase a car. Using your savings on the car means that you no longer have the cash for your overseas trip. So essentially, buying a car with your own money has cost you your holiday — the holiday is the opportunity cost. Depending on how highly you value your holidays, this could end up very costly! Sure, you could take out a loan to use for a holiday, but an unsecured personal loan for a holiday might end up costing a lot more than a secured car loan would have.

The disadvantages of finance

The main disadvantage of using a car loan is that you will need to pay interest. The interest is calculated periodically on the remaining balance of the loan. For example, an interest rate of 10% for a $20,000 car loan with a loan term of 2 years, will end up costing you $22,150 over the life of your loan (excluding fees, taxes, commissions and other charges associated with buying a car). This means you repay the $20,000 you borrowed, as well as $2,150 in interest.
While an interest expense may seem like a disadvantage, consider the cost of the interest compared to your opportunity cost. If taking out a car loan allows you to do something more rewarding or fulfilling with your savings or time, then you may gain more value by taking out the loan.

The advantages of finance

With car finance comes interest costs. The fact that interest payments are required can sometimes turn people away from getting a loan, but they likely haven’t considered all the factors. While it may be cheaper in the long run to buy a car upfront with your own money, there are some significant benefits of opting for car finance. A car loan could help:

Keep your savings in the bank.

Assuming you have the cash, buying a car outright will significantly reduce your money in the bank. Keeping money in the bank is important for risk prevention. If you are hit with any unexpected expenses, you have access to funds to meet these unforeseen obligations. Most car loans are customisable in terms of their repayment frequency and length. Therefore, you may be able to arrange a repayment schedule to work in with your budget and keep your savings aside for a rainy day.

Keeping savings in the bank may be crucial for anyone thinking about purchasing a home in the future. If you spend your house deposit on a car, you’ll need to start saving all over again. You generally can’t use a personal loan as a home deposit, and most lenders require at least six months of legitimate savings in your account. So spending your savings on a car could set your home buyer journey back by a long time!
Build a positive credit score

Your credit score is a rating used to determine your credit risk, or how likely you are to repay a loan. Every loan you take out and successfully repay on time goes towards building a stronger credit score. As you establish a positive credit history, you may be able to borrow more money and possibly at better loan rates.

Once your loan is repaid, the next time you apply for a loan (whether it be for a new car or something else), you’ll likely find it easier to be approved.

Can you get a flexible car loan if you have bad credit?

We take the time to understand your individual circumstances before recommending a flexible car finance solution to suit your needs. We arrange loans from $5,000 to $75,000** to purchase a new car or used vehicle.

Call us today on 1800 346 663 to find out how we may be able to help you!


Talk to our Team
Get your new car immediately

Without a car loan, you could spend years saving up for a car. Owning a car gives you freedom through transport. Getting to work, taking your kids to sport, picking up groceries can all become easier by owning a car.

For most of us, it’s not feasible to wait months and even years saving up money to purchase a car, especially when you need the car now! Saving up for your car could mean months of taking groceries on slow public transport, or missing out on that long-weekend road trip. Many would agree that losing time is much worse than paying a bit in interest costs — and in some circumstances, interest expenses can be used as a tax deduction – but it is always best to seek independent financial and taxation advice before considering any potential tax deductions.
If you’re struggling to figure out whether you’re better off financing your car or paying for it upfront, it might be a good idea to speak to an accountant or financial adviser. They’ll be able to look at your personal circumstances and help decide what’s best for you.

At the end of the day...

Whether you choose to use a car loan or pay for a vehicle upfront is entirely up to you. There are pros and cons for spending your own money as well as for applying for finance, so it comes down to what works for your circumstances.

To discuss your suitability for applying for a car loan, feel free to get in touch with us. We’re more than happy to help. Apply for a Car Loan

Disclaimer: The information above is of a general nature only and does not consider your personal objectives, financial situation or particular needs. You should consider seeking independent advice regarding your legal, financial, taxation or other needs, to check how the information relates to your particular circumstances. We do not accept responsibility for any loss arising from the use of, or reliance on, the information.

All loan applications are subject to normal lending criteria. Fees and charges payable. Terms and conditions apply.

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Makala Elliott

Makala is the Marketing Manager at Finance One. She has worked in the Finance and Lending industry for over 10 years, gathering a wealth of experience. She is passionate about helping Australians get back on track with their finances by passing on her knowledge.

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