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Should You Finance or Purchase a Car Outright?

So, you’re looking for a new set of wheels. You might be considering whether it’s best to purchase a car outright or if there’s a valid reason to use finance. The answer to that question really comes down to your personal circumstances and your goals for the next few years. In this piece, we’re going to unpack the pros and cons, and hopefully, by the end, you’ll feel more informed to make the best decision for your needs.

Things to consider

If you’re about to purchase a new car, it’s easy to get caught up in the excitement of choosing which model, colour and extras you need, but before you get too excited, it’s worth seriously considering how best you pay for it. Aside from a home loan, a car is one of the most expensive and important financial decisions you will make over your lifetime, so take the time to consider your options.

Apart from choosing how to pay for your car, you might also want to consider purchasing a new car vs a used car. Unlike a house, a car is a depreciating asset, so regardless of which vehicle you choose, you’re likely to lose money on this purchase over time. If you’re considering purchasing a second-hand car, make sure you do some thorough research on sites like Cars Guide to ensure you’re paying what it’s worth.

Should you purchase a car outright?

The most straightforward way to purchase a car is to pay upfront. You know exactly how much it is and there’s no need to wait for finance approval. We take a closer look at the pros and cons below:

The pros

  • There’s no debt obligation – you know how much it is and there are no interest rates to accrue.
  • You may be in a better position to negotiate if you pay in total upfront which might save you money overall.
  • The process is much more straightforward. You don’t have to apply and wait for finance approval, meaning you’re likely to get your car quicker.
  • If you plan to upgrade or sell your car in a few years, you will be in a better position as there are no early exit loan fees to consider, so there are no limitations as to when you can sell your car.

The cons

  • You may be limited to the make and model based upon the amount of money you have to spend which might mean you choose a less desirable or suitable car.
  • There’s an opportunity cost to consider. Using your savings to invest in one item means you’re forgoing the chance to use this money elsewhere.
  • Depending on how much you have saved and how much you have left, you may be leaving yourself without an emergency fund should something unexpected happen.

Financing your new car

Well, we’ve unpacked the nitty gritty of purchasing a car outright, it’s time to take a closer look at car finance and the associated pros and cons.

The pros

  • There is some flexibility regarding how you finance. You can use your dealership, a bank, or a broker just like us. You may also be able to obtain secured or unsecured finance. The interest and fees associated with each lender will vary so make sure you take time to explore your options properly.
  • Interest rates are currently quite low, meaning additional interest charges may not be as high as they otherwise would.
  • The amount owing is broken down into manageable, recurring regular payments which might be easier to manage.
  • You might have a limit on how much you can borrow but it’s most likely less restrictive than if you were buying outright.
  • Obtaining a car loan can help you to build your credit history which may be helpful in the long term. Comprehensive credit reporting is a detailed view of your financial behaviour and includes everything from your credit cards and bills to a car loan and a mortgage. So, obtaining a car loan may come in handy if you’re considering purchasing a house in the next few years.

The cons

  • Additional charges, like interest rates and loan fees, can make this a more expensive process overall.
  • Some loans may limit your choice of car. For example, if you’re obtaining secured finance, this means your car is being held as security against the loan. Essentially, this means if you default, the lender can seize the car as payment. With this kind of loan, there may be limitations to how much you’re able to borrow, so you might have to downgrade your expectations.
  • If you have a secured loan, your car insurance may be more expensive. Statistically, with most insurers, there are more claims on cars with secured finance which means that there is a greater risk to the insurer. As a result, the insurance costs are often higher to reflect that risk.

If you’ve still got questions about financing your car, read this blog on, ‘Everything You Need to Know Before Financing a Car.

Inovayt Financial Planner, Luke Mase encourages people to consider the potential long-term impacts that purchasing a car will have on your circumstances.

“It’s important not to rush into the decision and to understand the pros and cons of each option and what they mean to you,” he says.

Whether you purchase a car outright or obtain finance, it’s a big decision. Take your time, consider your options and most importantly, do your research. It’s not just about how much the car will cost initially, you also need to consider ongoing maintenance costs, insurance and registration each year. While you may be in a position to purchase a car outright if something unexpected happens do you still have enough money on hand? If you’re considering obtaining finance for your next car, get in touch to see how we may be able to support you.

Need help deciding which option works best for you?

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The information contained on this website is general in nature and is no way intended to be legal, financial or investment advice. The information provided is not intended to be taken as, or relied upon as financial advice or providing recommendations in relation to any financial product. You should seek independent financial advice from a licenced financial services advisor to check how this information relates to you and your circumstances. Inovayt Pty Ltd and Inovayt Wealth Pty Ltd does not accept any liability for injury, loss or damage incurred by the use or reliance on the information provided on this website.

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