Auto Loans or Cash?
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by: laurawilder
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The most important thing you should do to prepare to purchase a new or used car is examine your finances. Whether you plan on applying for auto loans or paying with cold hard cash, you need to know how much car your budget can handle. There are advantages and disadvantages to both paying cash and financing, so you will need to determine what is best for your financial situation.
Buying a car outright is much less complicated than taking on auto loans. You will not have any paperwork, no one has to examine your credit scores and reports, and you answer to no one. As a bonus, if you pay cash for a car, you will likely not get in over your head financially. You own that car. The title will be yours.
Before you decide how much cash you want to spend on the car, however, you should ask yourself what you are sacrificing in order to purchase that car with cash. Maybe you need to pay for new storm windows, so should buy a used car. Or perhaps it would be more advantageous to pay off your school loan in lieu of a new ride. For most car buyers who can afford to pay cash, they do not have enough cash liquid. Instead, they have to cash out an investment or pull the money out of an account that may have a penalty. It is also possible that the cash you spend on that car could offer more investment opportunity elsewhere, particularly when you weigh it with some of the low rate auto loans dealerships are offering right now. But cash is simple. You own the car and do not incur debt to anyone by paying cash.
In examining the options offered by various auto loans, the most important thing to know is what you can afford. The easiest way to determine that is to calculate a budget based on your monthly spending. Begin with what you bring home after taxes each month. Then sum up all your mandatory expenses, such as mortgage payments or rent, student loan payments, utility bills and grocery bills. Subtract that total from your take home salary. Then subtract the total estimate of what you spend on discretionary expenses, such as dining, magazine subscriptions, gas, gym memberships and clothing. Make sure you also include the amount per month you presently or hope to set aside for savings and retirement. That remaining number is what you can afford on an auto loan payment, assuming there are no other big ticket items you plan to purchase within the time you anticipate having the auto loan. Do not forget that you are responsible for additional expenses such as insurance, licensing, gas, maintenance, parking fees, registration and a down payment to kick the loan off. Most, if not all, of those expenses are dependent upon the type of vehicle you purchase and the purchase price. Thoroughly outline all the costs before you take on any auto loans.
Whether you plan to apply for auto loans or pay cash, know the maximum amount you can spend before you begin to look at cars. Do not veer from that course. Put it on a yellow sticky and put it in your wallet. Dealers always try to talk you up with fancy bells and whistles and what appear to be fantastic deals. You are responsible for making those payments, no matter how great the deal may seem at the time. Be strong and protect your finances by knowing what you can and want to spend.
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