Have you had enough of your beloved truck stalling out? Would you like to get something better than your 2005 Corolla so you can jam out to more music than just your old mix CDs?
If you’re trying to purchase a new, or new to you, vehicle, you might believe that financing is the best option. In fact, 79% of new cars were financed in 2023. 1.
We’re here to give you the straight talk about financing a car and what it really costs you before you sign on the dotted line. But what does financing a car really mean, and is it really your best option?
The Truth About Financing a Car and Why It’s Not Your Best Option
Have you ever wanted to drive a shiny new car? Or perhaps you just need a trustworthy vehicle to get you from place A to place B? For whatever reason, financing a vehicle could appear to be the simplest route to take. However, let’s discuss what financing a car actually entails and why it’s not always the best option before you sign on the dotted line.
The Scoop on Financing:
In a nutshell, financing a car means you borrow money to buy it and agree to pay it back (with interest) over a set period. Sounds simple enough, right? But here’s the catch: you don’t actually own the car until you’ve paid off the loan in full. Until then, the bank (or whoever lent you the money) is the real owner. They’re just letting you drive it around as long as you keep up with those monthly payments.
The Not-So-Pretty Truth:
Now, here’s the part that most car salesmen won’t tell you: financing a car might get you driving sooner, but it’ll cost you a whole lot more in the long run. Let’s break it down:
- Interest: Because you’re borrowing money, you have to pay interest on top of the loan amount. This can add thousands of dollars to the total cost of the car.
- Monthly Payments: Those monthly payments might seem manageable at first, but they can eat up a significant chunk of your budget, leaving you with less money for other things you need or want.
- Longer Debt Cycle: Financing a car keeps you trapped in a cycle of debt, making it harder to reach your financial goals and build wealth.
The Different Flavors of Financing:
There are three main ways to finance a car:
- Direct Financing: You get pre-approved for a loan from a bank or credit union before shopping for a car.
- Indirect Financing: You apply for a loan through the dealership when you buy the car.
- Leasing: You essentially rent the car for a set period and don’t own it at the end.
Every option has a set of disadvantages, even though some may seem more practical than others.
The Credit Score Factor:
Your loan terms are heavily influenced by your credit score, particularly the interest rate. Your interest rate will be better and you will ultimately save money if your credit score is higher.
The Big Question: Is It a Good Idea?
In short, no, financing a car is not a good idea. It’s a costly way to get a car, and it can hold you back from achieving your financial goals.
But Wait, There’s Hope!
Don’t despair, car enthusiast! There’s a better way to get your dream car: buy it with cash. Yes, it might take some time and discipline to save up, but it’ll be worth it in the long run. You’ll avoid the burden of debt, the stress of monthly payments, and the high cost of interest.
So, What’s the Next Step?
It’s time to ditch the idea of financing and start saving for your car. Create a budget, track your expenses, and set aside money each month. With a little planning and discipline, you’ll be cruising around in your dream car in no time, debt-free and financially secure.
How to Get a Car Without Financing
You save up and purchase a car with cash, so how do you make that dream car a reality (without the nightmare of an unaffordable car payment)?
The way it works is that if you were to save the average new car payment of $726 for a year, as opposed to paying the dealer, you would have $8,712 instead. 6 You could purchase a trustworthy used car with that amount of money in cash! Additionally, if you continued to save that $726 for a year while driving the car, you would have an additional $8,712 in addition to the trade-in value of your vehicle!
You can eventually save up enough money to buy that 4Runner outright if you continue to save and upgrade your vehicle as needed. However, you would still be required to make sizable monthly payments to the dealership (plus interest) if you had financed that vehicle.
It’s time to stop dreaming about a car and start saving. Your first step is to create a budget and be intentional about putting money away. Every. Single. Month.
And saving is easy with the sinking fund feature inside our free budgeting app, EveryDollar. To see your car savings increase, you’ll decide how much to save overall, plan your monthly budget, and keep track of your progress.
Is It a Good Idea to Finance a Car?
Nope, it’s not a good idea. In fact, it’s a horrible idea.
Listen, we get wanting to have a nice car (or even just a reliable car). But when you do the math, you’ll see that financing a car isn’t worth it. A monthly car payment not only prevents you from accumulating wealth, but it also robs you of your tranquility.
That $700 car payment is $700 you’re not saving or investing for your future. And that payment weighs heavy on you every single month. And for what—to impress the parents in the carpool line?.
In actuality, you don’t need to obtain a car loan in order to purchase a decent vehicle or even your ideal vehicle (more on that in a moment). Just imagine how free you would feel if you didn’t have a car payment holding you back!.
Why You Should Finance Your Car (And Not Pay Cash)
What is financing a car?
Financing a car means taking out a car loan that you repay over time. When you take out a car loan, you agree to pay back the amount you borrowed, plus interest and any fees, within a set period of time.
How does financing a new or used car work?
Financing a new or used car involves taking out a loan to cover the cost of the vehicle. Doing so allows borrowers to pay the loan via monthly installments over a specified period rather than paying the full amount upfront.
Should you finance a car?
If you want to own your car without paying for it outright, you can finance the car instead. This is a better option for people who want to have full ownership of their vehicles after completing their scheduled monthly payments. Here’s what you need to know about financing a car. What is financing a car?
How do you finance a car?
Financing a car means borrowing money, typically from a bank, credit union, or financing arm of a car manufacturer, and paying it back over time to buy that car today. This is how most of us buy a vehicle. Some buyers decide to lease instead, and some finance. But nearly all of us use someone else’s money to purchase a new or used vehicle.