Not everyone who needs a new car has a huge budget or the means to take out a loan. Even if they can, taking out a loan can result in hundreds or thousands of dollars in unnecessary fees. The reality is that paying cash for a car, no matter what the budget range, will always be less expensive than financing or leasing a car.
What Exactly Is Your Car Budget?
The first step is to determine what type of vehicle is affordable. Review the household budget, including existing debts and monthly obligations. Is there room in the budget for a car and related expenses? Make sure the budget includes not only what would be necessary for a monthly car payment, but also:
- Gas prices in relation to the size of the car
- Monthly and ongoing maintenance costs
- Insurance premiums and deductibles
- License plate or registration renewal
- Unforeseen repairs
Designate this total amount to be put away each pay period in a car savings fund. Try not to spend more than 20 percent of your income on car-related expenses. This fund can be padded with tax refunds, gifted money and extra cash earned from odd jobs to supplement any savings. When you have enough saved, it’s time to go shopping.
How Cash Saves Money
Avoiding Fees and Interest — Paying cash saves two things at the dealership — application fees and associated loan interest. These are usually worked into the finance or lease contract, so most people don’t even realize how much they add to the bottom line. The interest from financing a vehicle can be several thousand dollars over the course of the loan — a lot of extra money no one needs to pay.
Avoiding Credit Restrictions — People with less than stellar credit scores are at risk for getting denied for an auto loan. If they do get approved, they may be placed in a high-risk category with higher interest rates, poor loan terms and higher monthly payments. Having cash on hand to pay for the car eliminates the need to even look at a person’s credit, avoiding a hard inquiry and the subsequent ding to the credit score.
Reduced Insurance Costs — Lenders often have strict criteria for a buyer’s car insurance. They will not only require a buyer to carry comprehensive and collision coverage, but they may require higher bodily injury and property damage limits as well. They will also place a maximum on the deductible a buyer can choose. Paying cash curbs insurance costs by allowing the buyer to set the deductible higher while still keeping their full coverage insurance affordable.
Prevents Overextension — Car dealers want to make the best sale possible. They are good at talking people into buying cars out of their price range, especially if they can get a lender to approve the loan. Cash buyers hold all of the negotiating power when they step onto the sales floor with a specific cash budget.
No one should ever spend more than they can afford on a vehicle. Anyone willing to do a little research and spend some time saving can get a car within their budget range, and potentially save thousands by doing so.
~Here’s to Your Financial Health
