The conventional wisdom about paying for a car is to try to pay the entire price upfront so that you don't have to mess with financing or pay interest on a loan. And this is generally sound advice because who wants to spend their hard-earned money on interest, right? Well, this advice sometimes doesn't apply. In fact, there are four situations in which getting a car loan is actually better than paying cash for a car. These situations aren't all that rare, either.
Better Payment Record on Your Credit Report
A car loan is going to go on your credit report, and your payments will be recorded there, too. If you have little to no credit history or have poor credit from past issues that are now over, a car loan with payments made on time can be a fantastic way to increase your credit score. So much of your score depends on payments made on time that if you add this car loan and are not late on your payments, then you could see your score jump up over just a few months. If you pay over a few years, you could see your score rise substantially.
More Cash in Your Savings Account
Another reason to get an auto loan is that if you pay the whole price upfront, you're taking a chunk of money out of your savings. If you have a lot of savings, that might not ring alarm bells. However, if you have very little in savings other than the cost of the car, then paying cash will leave you with almost nothing to rely on in an emergency. A reasonable down payment plus a low-interest monthly payment will preserve your ability to handle emergencies should they arise. Most car loans allow for early repayment if your savings situation improves a lot.
More Cash for Debt With Worse Interest Rates
On a related note, keeping the bulk of your cash can also help if you have other debt that has high-interest rates. Car loan rates have been pretty good, historically. Why avoid a car loan only to keep struggling with a student loan with high-interest rates, for example? Why not use that cash to pay down the student loan?
That Auto Loan May Come With Some Perks
Sometimes you can get some deals when you finance, not just on the loan but also on the price of the car. If you can get some discounts on the price—say you're offered $500 off the price when you finance for at least three years—the discounts may be more than the interest you'd pay if you kept the loan for a while and then paid it off early.
When you want to buy a car, take a very good look at your financial situation. You might find that taking on a car loan and its payments is actually a better financial move for you in the long run. Contact auto loan providers to learn more.