Car Payments vs. Purchase Price
If you are currently looking at buying a new car, then you have many decisions to make. One of those is to decide how you are going to pay for the purchase. The cheapest and fastest way to buy a vehicle is to pay cash. If you can and want to pay cash - then that is great. If however, you are not in a position to buy your new vehicle outright, then you still have a choice - to finance your purchase or to lease your vehicle.
Here are a couple of questions to ask yourself before deciding:
• Is the long-term savings more important than lower monthly payments?
• Could the money that you could have put into the car be put to a better use in other investments?
• Do you want your asset/liability ratio kept to a certain level for other reasons?
Paying cash
If you are paying cash, you negotiate on the one price, and buy the car outright. You will have to pay taxes on top of the purchase price but there are usually no extras fees.
Advantages of a cash purchase
• The final price (including taxes) is the final price
• There are no payments to worry about
• Your credit is not involved in the deal
• There are no extra costs like financing charges
• You own the vehicle at time of purchase
• You have equity in the vehicle
Disadvantages
• Have to put out the full cash price
• Have to sell the vehicle when I no longer want it
• You may have a better place to put the money than in a depreciating asset.
Financing a vehicle
There are two main types of financing, a traditional loan and a lease. The difference between the two is simple. For a traditional loan, you make payments to pay out the cost of the vehicle. For a lease, you make payments for the use of the vehicle. For the purposes of the discussion, here we will focus on the traditional loan.
An auto loan or traditional loan as it is sometimes referred to as has two components. These are:
1. The principal charge – the principal pays off the full vehicle purchase price
2. The finance charge – the is the loan interest
Part of the loan payment is the depreciation charge. You will never get this money back, even when you sell the car in the further. All vehicles depreciate and they depreciate faster the younger (newer) they are.
The remainder of this principal payment is the equity. This is what the value that is left in your car after the loan is completely paid out and after the depreciation has been considered. This equity is then your resale value. If you follow this line of thinking twenty years into the future when the vehicle is just a heap of metal then understand that the equity is the scrap metal value.
Therefore, buying a car with a loan is the same as putting money into a declining-value savings account. This is one where you never get out as much money as you put in. A portion of every payment you make is lost to depreciation and finance charges. At the end of all of these payments, you have the equity equal to the value of the vehicle at the time. Doesn't sound like a good investment, does it? But few cars are purchases for their investment value.
Advantages of financing
• Less initial cash outlay
• May be the only way you can purchase a vehicle
• Good for someone with an inconsistent income
Disadvantages of financing:
• Higher cost due to financing charges (costs vary depending on location)
• A monthly payment to have to come up with every month
• You don't own the car – the finance company does
Regardless of how you choose to purchase your new vehicle, make sure you shop around to get the best price for what you want, a dealership you are happy, and with a salesperson you trust.
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