Is It More Advantageous to Pay Cash or Apply for Auto Loans?
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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. Once you know what you can afford, you can look at the pros and cons of paying for the car in cash or taking on an auto loan.
Paying cash for your new car, rather than relying on auto loans, can be a very smart move, particularly if you have saved funds for the purchase. You will not have any paperwork, no one has to examine your credit scores and reports, and you answer to no one. You also will not buy more car than you can afford. You own that car. You will possess the title.
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 should you forgo the car for a few more years until your kids are out of college? Most people do not set aside "car money" in a jar on top of the fridge for years to save up. 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. But cash is simple. 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. Begin with what you bring home after taxes each month. Next, add up all your necessary spending (loans, electric bills, phone bills, tuition, etc.) Deduct those mandatory expenses from your income. Then subtract the total estimate of what you spend on discretionary expenses, such as dining, magazine subscriptions, gas, gym memberships and clothing. Make sure you also include the amount per month you presently or hope to set aside for savings and retirement. 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. Thoroughly outline all the costs before you take on any auto loans.
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. Write it down if you need to. Dealers always try to talk you up with fancy bells and whistles and what appear to be fantastic deals. The dealer will not pay your bills for you. Be strong and protect your finances by knowing what you can and want to spend.
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