Buying a new car is a significant investment that requires careful consideration. One of the most critical decisions car-buyers have to make while purchasing a new car is whether to pay for it with their savings or take a car loan to buy it. As both options have their advantages and disadvantages, it can get difficult to choose between the two. We discuss the pros and cons of both thes options below. 

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

Here are some of the steps that can make the decision to buy a car with with savings or by financing easier —

Benefits of buying car with savings: No interest charges

 

By buying a new car with cash, car-buyers don't have to worry about paying interest charges that come with financing. It significantly lowers the total cost of car ownership than if it was financed, and also helps save money in the long run. Such car-buyers don't have to worry about making monthly payments either. 

 

Benefits of buying car with savings: Better negotiating power

While paying for a car with cash, car-buyers also have better negotiating power with the car dealer. They can use their cash payment as leverage to negotiate a lower price or get additional features, accessories or extended warranty added to the car for free.

 

Benefits of buying car with savings: Zero debt

 

Buying a new car with savings means that the car-buyer will not have to take on any debt. And this can also be of significant advantage if they plan to take another loan, like a home loan, and want to maintain maximum loan eligibility.

 

 

Benefits of financing a car: More affordable upfront cost

One of the biggest advantages of financing a new car is that it allows the car-buyer to purchase a car that they might not be able to afford with cash upfront. This means that they can get a nicer car that has more features, better performance, and higher safety ratings.

 

Benefits of financing a car: Building credit

Financing a new car can also helps build credit score. As long as they loan recipient makes payments on time, they'll be able to demonstrate to lenders that they're a responsible borrower. This can be particularly beneficial if the loan recipient plans to take a mortgage or other types of loans in the near future.

 

Benefits of financing a car: Better budgeting

Financing a new car also allows to budget expenses better. The loan recipient will know exactly how much they need to pay each month, which can help them plan finances more effectively. And depending on the lender, they may be able to choose between different interest rates, payment terms, and down payment options.

 

Benefits of financing a car: Opportunity cost

Most importantly, financing a new car allows the borrower to use their savings for other investments that have a higher return on investment. If they're able to finance a car at a low interest rate, they may be able to invest their savings in stocks, real estate, or other assets that have the potential to earn higher returns.

Let's understand this better with an example -

For instance, if a car-buyers takes a car loan of Rs 10 lakh, at the average prevalent car loan interest rate of 9.5% for the most common duration of 60 months.

They'll pay an EMI of Rs 21,002 per month — paying total interest worth Rs 2,60,112 to the bank over the course of 5 years.

So, they'll end up repaying Rs 12,60,112 for a loan of Rs 10 lakh. Apart from this they'll also be required to pay the processing fees, file charges and the taxes involved. 

Car Loan Interest Rate Tenure (Years) EMI Interest Payable Total Amount Paid
10,00,000 9.5 5 21,002 2,60,112 12,60,112

So, by buying the car by paying Rs 10 lakh upfront, they'll end up saving Rs 2,60,000, plus the miscellaneous charges.

 

Investing the loan amount 

However, if the car-buyer took that Rs 10 lakh and put it in mutual funds and factoring the ups and downs over 5 years if the average return came up to the same 9.5% rate of interest, then they will end up receiving Rs 15,74,239 after 5 years - which is an additional Rs 5,74,239.

Amount invested Return @Rate Tenure (Years) Amount after 5yrs Interest Earned
10,00,000 9.5 5 15,74,239 5,74,239

Ultimately, whether it makes more sense to buy a new car with savings or finance depends on one's financial situation and goals. If the car-buyer has enough savings to pay for a car upfront and wants to avoid debt, then paying with cash is the best option. 

However, if they're looking for a more affordable upfront cost, want to build their credit score and have more flexible payment options, then financing the car may be the better option for them.

(Disclaimer: Rate of interest varies from bank-to-bank. Readers are advised to consult their financial advisors before making any decision.)