Should I Take on Auto Loans or Pay Cash
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. The car will be yours. 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. Should you be buying a cheaper car to save for a new roof, for example? Or perhaps it would be more advantageous to pay off your school loan in lieu of a new ride. Most people do not set aside "car money" in a jar on top of the fridge for years to save up. Instead, they have to cash out an investment or pull the money out of an account that may have a penalty. It is also possible that the cash you spend on that car could offer more investment opportunity elsewhere, particularly when you weigh it with some of the low rate auto loans dealerships are offering right now. The bottom line, though, is that cash is cash. You own the car and do not incur debt to anyone by paying cash.
In examining the options offered by various auto loans, the most important thing to know is what you can afford. The easiest way to determine that is to calculate a budget based on your monthly spending. Begin with what you bring home after taxes each month. Then sum up all your mandatory expenses, such as mortgage payments or rent, student loan payments, utility bills and grocery bills. Subtract that total from your take home salary. Then subtract the total estimate of what you spend on discretionary expenses, such as dining, magazine subscriptions, gas, gym memberships and clothing. It is wise to also subtract what you currently or would like to save or invest each month. That remaining number is what you can afford on an auto loan payment, assuming there are no other big ticket items you plan to purchase within the time you anticipate having the auto loan. 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. Most, if not all, of those expenses are dependent upon the type of vehicle you purchase and the purchase price. 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. Do not veer from that course. Put it on a yellow sticky and put it in your wallet. That guy on the car lot will always try to sell you a fancier model than you planned on. You are responsible for making those payments, no matter how great the deal may seem at the time. Be true to yourself and do not spend beyond what makes you and your budget comfortable.
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