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Different ways of paying for your car

There are many ways to pay for a car, you can buy it with cash, lease or finance it. We’ll examine the pros and cons of each so when you find your dream car, you can choose the best way to pay for it. Here is a summary table of the major differences between each method.

  Cash Financing Leasing
Upfront payment Cost of car 0% - 15% $0 - $1000
Monthly payment None High Low
Insurance requirement State minimum Low deductible Comprehensive
Sell the car Easy Harder Not allowed
Other restrictions None None Annual mileage limit
Total cost Least In between Most

At the end of the day, the method you choose depends on what type of car you’re getting, how long you plan on keeping it, what your credit score is, and whether you have the cash to purchase a car outright.

Cash payment

Ideally you should try to purchase a car in full if you can. It’s the cheapest way because you don’t have to pay for any interest cost, finance fees, and you have complete autonomy on what insurance to get and when to sell the car. If you have the means, then this is the way to go. Obviously a car is not cheap, so very few people actually pay for a car outright. You should also consider buying a second hand car as you’ll very likely find some really good deals, maybe even one you can afford! New cars are overrated and the vibrant used car market in the US proves a second hand car is worth a look.

The downside of purchsing a car in full is that it takes away a significant portion of your financial buffer in one go so make sure you still have enough reserve for the unexpected.

Financing

This is the most common way for purchasing a car but you’ll need a good credit score to get approved for a car loan. The great thing about this method is that you can pay for the car over a period of time and own the car outright after you’re done with your payments. This frees up your cash for other purpose. It is also pretty common for car manufacturers to advertise 0% financing deals to attract customers so you should take advantage of these deals when available.

The most important thing to remember when you finance your car is that you don’t actually own the car until you’ve paid the loan in full. This means that during the duration of the loan, you’re under the mercy of your lender. Lenders typically will have insurance requirements as they also want to protect their investment. Many lenders will require low deductible, which is the amount of money you need to pay before the insurer will pay a claim. This means that your monthly payment for car insurance will be higher than if you had chosen a policy with higher deductible. Another sticky point is if you need to sell your car while still paying for the loan. It maybe harder because buyers want assurance that the title is clear at the time of the transaction but you may need the payment in order to repay your loan. That’s why it may be harder to find a buyer willing to trust you.

Leasing

For the sake of smart money, you should try to avoid this option if you can. Leasing a car is analogous to throwing your money away because you get nothing in return other than the right to drive the car for a period of time. If you like driving a new car every few years then this is definitely the option for you. Monthly payments on a leased car is usually less than financing a car and you can usually lease a car with no down payments at all.

There are some gotchas with leasing that you need to be aware of. When you lease a car, you’re driving somebody else’s car, not your own, so obviously there will be some restrictions attached to it. Typically there will be an annual mileage limit on the leased car, around 10,000 miles a year, which is the amount most people drive a year anyway. Also you are not allowed to make any major modifications on the car. Be warned that you can expect to see penalties if you return your car with excessive wear and tear or more mileage than allocated! Before leasing a car, you should find out how much car insurance will cost. Many people are attracted to the low monthly payment of leasing but neglect to realize that the insurance requirement on a leased car will force you to pay much more than you had hoped.

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