Should you finance a car through a lender or pay cash for the car outright?
Embarking on the car-buying journey is an exciting moment for prospective car buyers. Buying a car, whether new or used, can have a long-term effect on your finances. So, you may naturally have an important question on your mind; what is the best way to pay for a car in Australia? Pay cash or finance new car?
There are two ways you can approach this — if you have the savings available, you could pay cash outright to purchase the car, or like many Australians, you could finance a car through a lender. The decision is ultimately determined by your personal financial preferences and circumstances. As a result, the question of whether to finance or pay cash for a car arises. Continue reading to learn more about financing a car versus paying cash up front, as well as the advantages and disadvantages of each.
Financing a car with a loan
What does financing a car mean?
Car finance is essentially a loan you can apply for from a bank or a non-bank lender to purchase a car for personal or commercial use. A Car Loan can be used to purchase your first car or to upgrade your current vehicle. You could be upgrading to a more reliable car to drop your children off at school, run errands, go on a family adventure, or you’re finally ready to buy your dream car! With a business Car Loan, you can even upgrade your workhorse and take your company to the next level.
Advantages of financing a car through a lender
- Improves credit history:Having a Car Loan can demonstrate your commitment to making regular loan repayments in accordance with the terms of the loan, which can help improve your credit history. Your Car Loan history can also be used to demonstrate that you are in control of your finances and may indicate dependability to lenders and banks. Consistent and timely repayments in accordance with your loan contract may help improve your credit score over time and your chances of obtaining future financing at a lower interest rate.
- Saves time: One of the many benefits of getting a Car Loan is that you don’t have to spend months or even years saving up the money. For many, they do not have the luxury of time on their side when they need to purchase a car.
- Tax-deductible:Depending on your circumstances, you may be able to claim the business portion of the asset as a tax deduction if you are a sole trader or running a small business. The interest expense associated with the Car Loan can also be claimed as a deduction. Before relying on or making any financial decisions, it is critical to always seek independent financial and taxation advice.
- Frees up your cash flow:Getting approved for car finance means you don’t have to fork out a lump sum of cash. Instead of spending your savings on a car, obtaining finance allows you to spend your money elsewhere. It could be used as a deposit on other major purchases such as a new house, piece of land, or maybe for your business cash flow. Directing your hard-earned savings to other important sources may not only help in buying more assets but it may also help improve your credit score while regularly repaying your loan in accordance with the loan contract.
While a Car Loan might seem like the right option, there are some other factors you need to consider when applying for a Car Loan, such as:
Monthly interest payments and fees
With a Car Loan, you will need to pay interest and any applicable fees. Interest rates may vary based on your credit score.
A Car Loan may tie you to a long-term contract with weekly, fortnightly, or monthly repayments based on your loan term. However, if you decide to upgrade your car and maintain good account behaviour in accordance with your loan contract, you may still be able to refinance the Car Loan. Some lenders (like Finance One) allow you to repay the loan early without any early repayment fees. *
Too many defaults or missed payments on your loan can do more harm than good to your credit score. It may have a negative impact on your credit score, and you may be charged a high interest rate on your next loan if you need to apply for one in the future.
Paying cash for a car
Paying cash for the entire purchase price is a simple way to buy a car outright. Simply, choose the car you wish to buy, choose the car dealer you want to buy from, pay cash, and drive away in your new ride. This raises the question; can you pay cash for a new car?
Dealers often prefer cash payments for car because it means a quick, guaranteed sale and gives them the benefit of the upfront cash payment.
Here are some of the advantages of paying for a car in cash:
- Debt-free and can save you money in the long term:If you have excess cash for a car, paying cash may save you the interest and fees you would otherwise have to pay over the course of a Car Loan. It can help you save a reasonable amount of money — and you don’t have to worry about your monthly repayments and missing the due date.
- There’s room to negotiate:When paying outright in cash for a car, you have more negotiating power. As dealers are often eager to close the deal, you may have room to negotiate the price. With a little negotiation, you could end up saving hundreds, even thousands of dollars on the purchase price.
- Straight forward:Paying cash for a car will likely reduce the amount of paperwork you would otherwise have to fill out. If in the future, you decide to sell or upgrade, you can do so without having to pay any potential loan contract exit fees.
You may also want to consider the disadvantages of paying cash outright to buy a car.
- Reducing your savings:Buying a car with cash may significantly reduce your savings. This may leave you with limited options on a rainy day.
- Paying cash will not improve your credit score: Although you may already have a positive score, paying cash for a car will not contribute towards your credit score, because there won’t be any history of consistent and timely repayments.
- Not the dealership’s top priority: Some dealerships might prefer the commissions they receive from the customers who finance their car purchases using their network of lenders. In that case, it may interfere with your chance to negotiate for a better price with the dealership.
Do your own research:
All things considered, buying a car with finance or cash for a car both have their advantages. It all depends on your financial situation and personal preferences.
Are you looking to apply for a Car Loan with bad credit history?
Finance One offers Car Loans for both personal and commercial use. We know that the road to finance is not an easy one, hence why we can consider your Car Loan application even if you’ve had a bad credit history. We have a genuine drive to understand and assist you in your financial journey.
To discuss your options for a stress-free loan application with a flexible repayment option, talk to one of our consultants to discuss suitable options on 1800 346 663.
How to get a car on finance?
When you apply for a loan with a bank or a non-bank lender, your credit score will be checked. A credit score is a method of determining your creditworthiness. This score ranges from 0-1200 and is used by banks and other lenders to determine whether or not to lend to you.
Because your credit score indicates your ability to repay the loan, certain lenders may charge you a high or a low interest rate based on it. Credit bureaus such as Experian, Illion and Equifax can provide you with information about your credit history. Download our free guide “How to improve your credit score” to learn more about credit scores and how to determine your own.
How to finance a car with bad credit?
If you have a bad credit score, traditional banks may reject your Car Loan application because a low credit score is often associated with higher risk. You may be able to apply for a Car Loan with non-bank lenders who consider loan applications even if you have a bad credit history.
A word of caution – every time you make an official enquiry for a loan with a bank or a non-bank lender, it will be recorded in your credit report. While shopping for a loan, do your research before applying for a loan to avoid excessive enquiries.
If you are looking for a trustworthy lender and you have experienced a bad credit history, contact Finance One today. Our highly experienced staff can discuss potential suitable options with you.
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 legal, financial, taxation or other advice 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.
* Some of our loans do have an early payout fee. We recommend you review your loan terms or contact us to confirm if an early payout fee applies to your loan.