"Hi Rob, I am 28 years old and I've saved some cash that I could use to buy a new car. I want to know whether to use this cash to buy a car outright or go to a finance company for a loan? Thanks"
- Michael, 28
Besides buying a home, buying a car is likely to be one of the biggest financial decisions you make.
After doing the fun things like picking the model and colour - then comes the choice about how to pay for it. So do you use the cash you've saved, or do you get finance?
It's a good question, and a common one raised by people in your situation.
When making this decision, there is a lot that needs to be taken into consideration. So here are the options that are available to you, and their pros and cons - hopefully that makes your decision that little bit easier.
Cash is a simple way to pay for your car, and there's no doubt that at face-value it's the cheapest. You pay the exact sum agreed, and once you've bought your car you don't have to worry about keeping up with monthly payments over a few years or paying interest on your loan.
Unfortunately, we don't always have a lump sum available when the time comes to buy a car. Putting off the purchase until you've saved the money isn't always an option, and opting for a cheaper vehicle usually means compromising on features that are important to you.
Many of our clients who can afford to buy a car with cash still choose finance. It's worth weighing up what you could do with a lump sum if you don't spend it on a vehicle. Beyond simply booking the family holiday, you could put that cash toward a deposit on a home, or into an investment that may give you a higher return than the interest you'd be paying on a car loan.
Finance is the fastest way to get your hands on a new car without having to save up the full amount, and if done correctly, is a quick and easy process.
Using finance allows you to pay off the car as you use it, so you pay for it across the life of the loan instead of upfront, as you would if you paid cash.
While you pay interest on a car loan, interest rates are very low right now (and can be locked in for the life of the loan, protecting you against rate rises). So consider alternative uses of your cash such as an investment with a higher rate of return or something a bit more fun like a family holiday.
A secured car loan lets you take ownership of the vehicle at the time of purchase, with the financier taking an interest in the vehicle as security for the loan (which means they have rights to the vehicle if you stop making payments and default on the loan). Securing the loan means your interest rate will be much lower than an unsecured personal loan. Once the vehicle is fully paid off, the financier lifts their interest, and it's all yours.
Loans can range from a term of 2 to 7 years, with shorter and longer options available in some circumstances. The key to getting the most out of your loan is to ensure the product is appropriate for your circumstances, which means considering options such as no early exit fees or penalties, if you think you will pay the loan out early.
There are a lot more options available for you if you choose to get finance. So to find out what can be tailored for you and your new car, speak to a stratton finance consultant.
Michael, if you have a mortgage, you may have considered drawing on equity in your home via a refinance or redraw facility to pay for your car, rather than getting a car loan.
It seems tempting, as mortgage rates are traditionally lower than car finance rates, and you also have the convenience of just one monthly payment for both the mortgage and the car loan.
However, because a home loan typically takes over twenty years to pay off, that means that you will be paying off your car, bit-by-bit, for the same amount of time - and paying interest on it that whole time, even if you've long since sold it!
So whilst it may seem appealing to tack the car loan onto your home loan, you will generally be paying a much higher amount overall. In the example above, you could buy a new car with the interest alone!
I hope that this has given you an insight into the different options that are available to you, and helps you make an informed decision when it comes time to buy your next car. Buying a car is an exciting time, but make sure you buy smart!
To discuss your finance options in more detail, or if you have any questions at all, we've got experienced consultants who can help. Give them a call on 1300 STRATTON (787 288) or submit an online enquiry. If you are interested in getting a car loan on a new car, you can get a 60-second online quote here.
If you have a finance question you've always wanted answered, now is your chance!
Our CEO, Rob Chaloner, will pick and answer some of your questions for our May newsletter. Submit your question here.