Is It Better to Make Payments or Pay Cash for a Car?

Monthly payments on a new car might be less on a lease vs. a loan.

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The decision whether to finance or pay cash for a vehicle might be well-thought-out or impulsive. Several factors could influence whether paying cash outright or taking out a loan makes sound financial sense. In addition to the long-term costs of financing and the planned use of the vehicle, a buyer's personal preferences make a difference. With a deal that includes financing, it is possible to negotiate a lower purchase price on some vehicles. Buyers also have the option of paying off a car loan early if they want to take advantage of low interest rates.

Dealer Resistance to Cash

Car dealers tend to resist cash deals simply because they do not make as much money. According to "The New York Times," dealers have more opportunities to make money on vehicles if customers take out a lease or a loan. A dealer makes additional income by arranging financing and selling extended warranties. Customers are also more apt to purchase vehicle options if they don't have to pay for them upfront. While dealers won't turn away customers who wish to pay cash, it is a good idea to research the market values of vehicles before making a deal.

Avoidance of Debt

An aversion to debt is one of the reasons to pay cash for a car. Some buyers who have the financial resources to purchase a car outright see this choice as the better alternative. Even though the negotiated price tends to be higher for cash deals, you will save money on interest or lease charges. Paying cash for a car also means that you will have more disposable income per month. You can use the money that would have gone toward a car payment for other purposes

Leasing Option

If you don't plan on using a car long-term, making payments could be the better alternative. Buyers that prefer to drive a new vehicle every two or three years might find leasing to be an attractive option. Although the negotiated prices of leased vehicles tend to be higher, you could end up paying less for the vehicle's use if it has a high residual value. The residual value is what the car is worth at the end of the lease. Leases include restrictions, so you you must make sure on a leased car that you do not exceed the annual mileage limits or incur excess wear and tear

Interest Rates

There are several sound reasons for taking out a loan instead of paying cash on a car if you can get a low- or zero-interest rate loan. If paying cash means that your savings will no longer exist, it is better to take out a low-interest loan; a car loan allows you to keep enough cash in your savings in case of an emergency. Low- or zero-interest financing is also a suitable option if you have a sizable down payment and want more time to pay off the remaining balance. A car loan does not carry a penalty charge if you decide to pay it off early. Also, if investing the amount equal to what you borrow would give you a profit over the cost of the loan, it's a smart choice.