Financing a Car: What Are the Pros and Cons?
As written for The Safe Driver.
An auto loan can assist you in reducing the initial costs linked to purchasing a vehicle by enabling you to distribute the ownership expenses across multiple years through installment payments. Nevertheless, it is important to weigh the advantages and disadvantages of financing a vehicle, particularly the effect that monthly car payments may have on your budget for the years ahead.
Should you consider financing a car? Before making a decision, take the time to investigate the overall cost of each option and determine if financing is the most economical choice.
Pro #1: It May Improve Your Credit Score
Even if you decide to go with a bad credit car dealership utah, financing a car can help you to improve your credit score. Your payment history constitutes 35 percent of your FICO score. By maintaining timely payments each month, your credit score is likely to improve throughout the duration of the loan. Additionally, your credit mix, which refers to the various types of credit you possess, contributes modestly to your credit score. Incorporating an auto loan can enhance your credit mix and provide a slight increase to your score.
Pro #2: It Can Help You Afford a More Reliable Car
Financing a vehicle could allow for a more premium choice within your budget, yet it remains crucial to assess the amount you can realistically afford to finance. Typically, a loan provides access to greater funds than what you might be able to save, particularly given the elevated prices of both new and used cars today. If you opt to pay in cash, locating a newer model with reasonable mileage may prove challenging.
Pro #3: Helps You Build Savings
By maintaining liquidity in your cash, you can allocate those funds towards establishing your emergency savings or investing in long-term financial objectives. Despite making regular loan repayments, you might counterbalance the interest incurred by generating interest from other sources; however, as is the case with any investment, market volatility carries risks, and it is essential to thoughtfully evaluate your saving or investing strategies prior to reaching a conclusive decision.
Con #1: Monthly Payments Can Be Expensive
Even if you choose to finance a vehicle that aligns with your budget, the monthly payment can still be quite high. On average, drivers spent $742 each month on new vehicles in the fourth quarter of 2024. This significant expense is in addition to insurance costs, which average $2,678 per year, so it can get expensive fast.
Con #2: Vehicle Value Depreciates
The value of your vehicle begins to decrease as soon as you leave the dealership. In fact, cars can lose up to 20 percent of their value within the first year, and this decline is likely to continue over time. If you are paying a high interest rate, you may find yourself owing more than the actual worth of your car, putting you in a situation where you are upside-down on your loan. This situation means you cannot sell the vehicle unless you have sufficient savings to cover the difference.
Con #3: There is a Risk of Damaging Your Finances
Failing to keep up with your auto loan payments can result in significant issues. Just a single missed payment can negatively impact your credit score, while several missed payments may result in the repossession of your vehicle.
Determining if an auto loan suits your needs relies on your financial situation and the duration for which you intend to keep the vehicle. Calculate the figures to assess how much you will be paying out of pocket throughout the term of an auto loan compared to buying a car with cash.