Before Financing Your New Car
Has it been a few years since your last automobile purchase? Are you debating between financing and buying the vehicle outright?
Before financing your next new car consider why you want to buy a brand new car. There are probably many reason and hopefully your ego is not one of them. Perhaps you got a raise at work, your old car just is not working the same as it used to or your car was in an accident.
Sure, in North America a car might be important but you do not have to put yourself in a financial bind to get around.
In this article, I will give you 5 reasons to consider before financing your new car. My hope is to have you look at your financial situation today and in the future to see if this is a good sound decision.
Why Not To Finance
Cost To Borrow
When you finance a car it can cost you between 0.99% and 8%, or more, to borrow the money for financing the car purchase.
Lets say you are looking a t a $30,000 vehicle and financing it over 60 months with a 0.99% interest rate. You would pay an additional $760. On a $60,000 vehicle you are paying $1522.
If you do not have the best credit, a $30,000 vehicle at 8% interest rate and 60 month term, could cost you an additional $6498. On a $60,000 vehicle you are looking at well over $12,000.
If you need a new vehicle and need to finance then consider if you can write the interest off through a business or perhaps you can use a line of banks line of credit if the interest rate is much lower.
Commit to Monthly Payments
When you buy a vehicle the term may vary from 12-96 months. The longer the term the longer you will be paying interest on your purchase.
The longer time you commit to making monthly payments it is possible life can happen and you lose your ability to make those payments.
What will you do if you lose your job? Will you still be able to make the monthly payments?
Consider this thought before financing your new car. Also keep in mind not only would you have to continue to make payments after you lose your job or have to give up the car but you would have to make payments on a depreciating asset/liability.
The Automobile Loses Value
I believe most of have heard that as soon as you drive your new vehicle of the lot, your car will lose 20% of its value. This happens because you are now the registered owner of the automobile.
Before financing, consider the fact you will be making payments on a vehicle that is worth 20% less. That means you are making payments on the purchase value not the real value of the vehicle.
Look At A Used Car
When your buying a new car from the dealership, the dealership has the upper hand. This may not always be the most popular option but consider looking at a pre-owned vehicle.
Look at dealership, Autotrader, Craig’s List, Kijiji and other similar sites. You will be able to find great options that are between 1 and 5 years old.
The reason a used car can be better is one you are paying cash for the car and you are not going to pay any interest to finance it.
Why cash? Easy, cash is king. Money in hand speaks when it comes to negotiation a price with the seller. The seller wants you money so they are likely to lower the price to get a quick sale.
Used Vehicles Hold Value
Here is another reason to consider a used car. A used car that is older than 10 years tends to hold its value after purchase. So even if you drive it and then sell it you can still get your money back in most cases.
If you are purchasing a used vehicle over 10-12 years you can usually request an inspection from the seller. This will allow you to know before making the cash purchase if the car your buying is any good or just a lemon.
Unless you are looking to buy a one of a kind exotic automobile you may want to consider not financing the purchase as an option.
Since I have sold cars and worked at two different banks, I speak from experience, I feel it is best to only spend the money you have.
If you can purchaser the vehicle of the lot with cash you might want to still consider if the purchase is a sound decision.
Although you might have the cash to purchase a car and believe you will be debt free, keep in mind you never know what life will bring your way and when you might need some of the car you spend on the car.
Do you know anyone who is about to buys a new car? Share this article with them before they do. You can also share this article on your favorite social media sites.
Will you reconsider your options before financing your new car? Leave a comment below.
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