Three Reasons To Finance Your Next Vehicle
After months of cutting expenses and saving your extra income, you have enough money to purchase a new vehicle. Before you drain your savings account, take a moment to decide if you are better off financing your next car. Financing a vehicle has multiple advantages that may make sense for your financial situation.
1. An Auto Loan Gives Your Finances Flexibility
A top benefit of financing your vehicle is that it adds flexibility to your budget. If you keep the majority of your money in your savings account and take out a loan to purchase your vehicle, you have options for your savings. It can act as your emergency fund, or you can tackle that home improvement project you have been putting off. If you feel like your retirement savings is lacking, use part of your car savings to fund an individual retirement account (IRA).
Some car buyers forget that they don't have to keep their auto loans for the entire term. Should you decide that you want to pay your vehicle off before your loan's scheduled end date, just make extra payments to accelerate the payoff date. Make sure that your loan does not have a prepayment penalty; you don't want your additional payments to be penalized.
2. You Can Get More Vehicle for Your Dollar
If you want to get the best vehicle for your money, financing your purchase can help you do so. Spreading your payment out over time permits you to stretch your dollar further than if you stick to your cash budget.
For example, assume that you have $15,000 in savings for your next vehicle. This is enough to purchase the base model of your preferred automobile; however, a model with additional features, such as a remote starter, backup camera, and heated seats, would make driving more enjoyable. The model with the additional features costs an additional $5,000. If you opt to take out a 5-year auto loan at 5 percent interest, the $5,000 difference comes to an extra $94.36 each month. For under $100, you can get a better vehicle that makes certain aspects of life more pleasant.
3. Your Money May Earn More Elsewhere
By purchasing your vehicle outright, you don't have to pay loan interest; however, if you have good credit, it is possible for you to get an extremely low interest rate. If your interest rate is 3 to 5 percent, your money may be better off when put to other uses.
For example, you can increase your retirement contributions, or fund a 529 plan for your kids' college savings. Over the long run, your funds will likely earn a higher rate of interest than what you pay for your auto loan.