If we want to buy a car, whether new or second hand, we will know that we will have to pay out a lot of money. We will tend to pay as much as we can afford because cars will be more reliable if we pay more for them in most cases. This will not always be true, but generally it will be. This means that we might be thinking about options for paying for a car when we know that we need one. There will be various options and it is good to consider them all and then choose the one that will be the best for you.
Borrow from dealer
Borrowing from a dealer tends to be the default method that many people use to buy a car, if they buy one from a dealer. It is convenient as you can organise the finance while you are buying the car. You may even be offered a discount if you use their finance and it could be interest free. It is worth making sure that you compare it to your other options though. Car dealership finance might be dearer than borrowing from a bank. Even if it is interest free, if you miss a repayment the costs could be very high or you could find that the cars from that dealership are more expensive than those from dealerships that do not offer interest free credit. So be very careful with your choice and make sure that you are not paying more than necessary.
A bank loan can be a cheaper way to borrow but it will depend on which bank you use. It can be worth getting a loan if it means that you can afford a car which will give you better value for money. However, it is not always that easy to calculate whether it will be, especially if you know little about cars and do not know how to choose one that is good value. Do make sure that the loan you take out has a competitive rate though and that you can afford the repayments. If you cannot repay it, then you will be charged even more money for it and it will certainly not be good value for money. It can be better to pay a bit more but spread the repayments over a longer time, rather than risk not being able to repay larger amounts.
There are other ways to borrow money as well and it can be worth considering these. If you buy a cheaper car then you might consider using a credit card or overdraft, for example. It is worth comparing different methods of borrowing though as you will find that some can be significantly dearer than others. Do not just compare the interest rates but try to calculate how much you will have to pay in total and compare that amount as that will give you a figure that is easier to compare.
If you have savings then it can be better to use these to pay for the vehicle than borrowing the money. Although you will miss out on the interest that you would otherwise get on your savings, it is normally the case that the cost of a loan will be higher than the interest that you get paid on savings. This means that it can be much better financially to spend your savings rather than borrow money for a car. It can be difficult to part with your money like this though. We become attached to our savings, perhaps planning on what we will spend it on in the future or remembering how much hard work we put into saving it. We may even be saving up for something specific and not want to spend the money on anything else.
Saving up specifically for a car can be a better approach to get around the attachment that you might have for other savings. You will have to start this well in advance of buying a car though and so you will need to be well organised with it – perhaps even starting as soon as you buy a car so that by the time you need a new one you will have enough saved up. It is worth calculating how much you think you are likely to need to buy a new car and then how soon you might need a new one. Then you will be able to calculate how much you will need to put aside each month.
It is good to be aware of all of the options available to you so that you make the best financial decision. Which will be best will depend on you and your situation as well as how much you need to pay out for the car.