Unless you have beaten the 1 in 12,271,512 odds and have actually won the lottery, or have been fortunate enough to have discovered a direct relation to Warren Buffet while drawing up your family tree recently, chances are that you are a confirmed member of the 99%. The hard truth is that our kind needs to think and act carefully when making major financial decisions such as buying a car; lest you find yourself in a pickle that just might snowball out of control before you even know it.
According to figures released by the Financing and Leasing Association, well up to 75% of new car sales were bought on finance through dealerships in recent years. Another study, however, shows that at least 77 million, or one-third of Americans face debt collectors. Thanks to the recent car subprime loan bubble, Americans have seen a 70% car repo rate. Perhaps you’re one of the millions that know all too well that you should do some research before making an actual decision. Here is the 411 on the good, the bad, and the ugly of car purchase options.
The saying goes that “if you cannot buy it cash, then you cannot afford it.” Straightforward and conventional, cash purchase requires that you have the required lump sum amount through honest savings and earnings (hopefully) and simply buy the car at its selling price.
- You don’t pay interest on the purchase price.
- You are virtually never at risk for repossession.
- You don’t risk or compromise your credit record.
- You actually own the vehicle outright.
- Freedom to alter the vehicle as you please.
- Because you don’t have the burden of paying monthly installments, you have extra cash to rebuild your savings.
- Rebate offers are always made to clients who decline to finance.
- Buying a car with cash, especially if you are still young, does nothing for your credit score, which is a bad thing if you want to buy a house on credit one day.
- Insurance rates tend to be higher for cars bought with cash.
- Maintenance is also quite higher for cars that are bought with cash.
- Because car salesmen sometimes get a commission on the financing that they arrange for their clients, they are more likely to be reluctant in negotiating the best possible deal for you as a cash buyer because their own incentive in the deal has decreased.
This is an option where a client chooses not to actually buy a car but instead use a dealership’s vehicle for a said period – usually up to 4 years at a time – thus, paying a monthly amount for the use of the car. Basically, the client pays a monthly premium to borrow a car from a dealership under a contract.
There are a lot of debates on leasing vs buying a car. However, there are no perfect answers to this question. You should consider all the factors and choose the one that suits you the most.
- It is considerably easier to qualify for a lease than it is for a finance loan.
- Sales tax is calculated and usually included in the monthly installments you pay as opposed to having to fork out on the entire purchase price.
- The ability to change cars at the end of your lease term for a newer model gives you the spice of life that is variety.
- Maintenance cost ranges from low to non-existent as a leased car usually comes with some included maintenance.
- You never have to worry about the future value of the vehicle.
- Vehicle leasing is especially a good option for businesses that use the cars for business purposes because they can save on taxes, maintenance costs, and don’t have to worry about the depreciating value of the car.
- You never actually own the car.
- It is actually much more expensive in the long run because you never actually stop paying installments on a car, unlike an outright purchase where you only pay for until the loan is paid off.
- Leased vehicles have a limit on how many miles you can drive per year, which could limit your mobility.
- It is very difficult to back out of a lease contract with penalties that can be up to six months of installment payments.
- There are always unseen, unsaid, and unforeseen costs with lease contracts such as acquisition fees, disposition fees, and excessive ‘wear and tear’ fees that you are liable for in the case of dings and scratches on the car.
Finance/Loan (of any type)
‘Car Financing’ is really an umbrella term for a variety of financial products that include Auto Loans, Hire Purchase, and the newly popular option, Personal Contract Purchase.
- Builds up your credit record for when you might need it in future such as for mortgaging a house.
- You build equity in the car.
- Car insurance rates tend to be lower.
- Maintenance costs tend to be lower while you enjoy the dealer’s warranty.
- Enables you to buy a better quality car than you could otherwise afford with a cash purchase.
- Vehicles lose value the very moment that you drive them off the lot, deprecate at an accelerated rate for years, and end up worth very little by the time you finish paying off the loan.
- You pay a whole lot more than the initial price of the actual car through interest and fees on the loan.
- You don’t actually own the car until you have finished paying it off years later.
- You risk the chance of having a bad credit record if you come into some financial difficulties and default on payments.
- Your car is also at risk for repossession, should you be unable to make payments.
- There is no deductible on the car if you use it for a business.
Sometimes, though, people don’t have the luxurious prerogative of choice when coming to these things; perhaps would really prefer to finance a car, but your credit score is just shy of being pristine, or maybe you just don’t have enough cash to buy the car outright. It is always a good idea to consult with a professional to help you gauge your options. It’s easy to make a bad decision that you’ll regret later.