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FAST FACT

On average in the West, people move house every 7 years.

PAYING CASH OR FINANCING A VEHICLE

by David Tarlo
9/17/2006

Whenever it is time to consider buying a vehicle, one important consideration is how you will be paying for it: paying cash or financing? In this article we’ll discuss when paying cash or financing is the best choice. Financing is not simple. On the other hand, paying cash is simple… if you have it. If you don’t have the cash, you can’t be paying with cash!

Staying Liquid

If the cash you would be paying will leave you without any available money. Consider the possibility of business investments or an emergency need. Sometimes, the cash, or a certain amount of cash, is best kept liquid and ready for use. If that’s the case, paying cash or financing a vehicle is not such a simple choice. For example, a new business venture will have a much higher interest rate if you were financing it, while a vehicle purchase, especially in today’s market, will have a lower interest rate. Another reason you might not want to pay cash to buy a car is a medical expense which will have a much higher interest rate if you were financing it. Moreover, paying cash for a down payment when financing a home or investment property that have an interest-compounding life of 15 to 30 years, and mortgage insurance, is much more economical than paying with cash for a vehicle.

No or Poor Credit History

What if you have the cash available, but no credit or poor credit history? Credit, and credit worthiness, is important in today’s uncertain financial life. In the case of little or no credit history, paying cash is not the best way (in the long-run) to use the money. Using the cash as collateral for financing a vehicle is smarter. Without a credit history, or a bad one, it is very difficult to qualify for loans, and especially large loans, like a mortgage. If approved, the interest charged will be higher than the going rate. In this case, the cash can be deposited in a bank or credit union account or Certificate of Deposit, and used as collateral for financing a vehicle purchase, which begins your new credit history. The more loans you qualify for and pay back, the better your credit score will become. The better your credit score, the easier it will be to qualify for financing in the future, allowing you to choose between paying cash or financing a vehicle.

Not Enough Cash

What if you have cash, but not enough for an outright cash purchase? In this case paying cash or financing a vehicle is a matter of your credit history and how easily you can get credit. As mentioned above, there may be reasons why you will choose financing over paying cash. In this case, the most important factor is whether your credit score is good enough to qualify for a low interest loan. Financing, as we will see, is not as clear cut as paying cash.

Tax Purposes

In business, paying cash or financing is often determined by other factors than having or not having cash or credit. Deductibility and profitability are the most important, and for tax purposes, financing might be more important than paying cash.

The arithmetic of paying cash versus financing.

When paying cash for a $5,000.00 vehicle, for instance, you could negotiate a lower price. Everyone likes cash, and a dealer will use the cash to purchase additional vehicles and make a larger profit. If you are planning to buy a used car, negotiation is easier, since the profit margin on used cars is greater than new cars. Paying cash allows you to avoid the financing costs, the interest!

Financing can be for as long as 6 years. However, the longer the loan, the greater the interest,
Let’s start with a good credit score. A 3-year loan would charge 8.59% interest versus the 6-year loan, which would charge 9.39% interest per year. On a $5,000 dollar car, you would be paying $158 per month for 3 years, which amounts to paying $1896 per year; or paying $91 per month for 6 years, which will cost you $1092 per year. In three years your total financing cost will be $5688 and $6552 financing for six years.

If your credit rating is very good, the 3-year interest rate would be 7.49% for which you would be paying $156 per month, while the 6-year financing rate would be 8.65%, and your payments would be $89 per month. In total, you would be paying $5616 for financing the vehicle for three years, and $6408 for financing the vehicle for six years.

If your credit rating is excellent, the 3-year financing rate would be 7.29%, and you would be paying $155 per month, while the 6-year financing rate would be 8.15%, for which you would be paying $88 per month. You would be paying $5580, total, for the three years’ financing, and $6336 for six years’ financing. But if your credit rating is only fair, the 3-year financing rate would be 8.69%, and you would be paying $158 per month, while the 6-year financing rate would be rise to 9.99%, and you would be paying $93 per month. This time, you would be paying $5688 for three years’ financing, and paying $6696 for six years’ financing.

You can see that financing a vehicle can cost you more, or less, depending on the length of the loan and your credit rating.

Compare:
Three year loan- excellent: pay $5580 Fair: pay $5688
Six year loan- excellent: pay $6336 Fair: pay $6696

Imagine financing a new vehicle at $20,000 or more!

Finally, when comparing whether paying cash or financing is right for you, we see that no matter what your credit rating is, you will be paying hundreds more for financing, compared to paying cash for your vehicle.

So, there you have it, paying cash is more economical compared to financing! And, when financing, the best credit rating, or score, can save you dollars. This score is called the FICO score (after the company that developed it: Fair, Isaac & Co). This score is calculated by the three main credit bureaus: Equifax (800-685-1111), Experian (800-682-7654) and TransUnion (800-916-8800). When you apply for financing, your lender will contact one or all three and check your FICO score.
OK! We know paying cash is the most economical. But what if you have to get financing? How do you get a good FICO score?

Roughly speaking, your FICO score is compiled from the following factors:

1) Your bill payment history – roughly 35%
2) How much do you owe – roughly 30%
3) Length of your credit history – roughly 15%
4) Applying for or adding New credit – roughly 10%
5) Other factors – roughly 10%

‘Paying cash or financing’ is not about how to improve a credit rating, or FICO score, so I will just point out quickly, that if you look at the top three factors, you have 80% of a score. What does that mean? It means paying bills, by check or cash, all bills, on time, and not skipping a payment. It means paying off your credit card debt and not getting new cards, and it means doing this for years… consistently. It also means not spending more than you earn! If you follow these simple strategies, you will have a good to excellent FICO score, or credit rating.

Paying cash is more economical than financing. But often, financing is the best option. In these modern days, financing is a necessary part of economic life and has to be managed and maintained with care and attention.

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Comments: 16
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School loan:
Construction loan:
consumers:
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Over 25 years of experience
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Over and over again, your success is our success
LOAN wrote:
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DO YOU NEED FINANCIAL ASSISTANCE?
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PROBLEM BY OFFERING YOU LOAN
LOAN OFFER
Please visit our list of products and services available bellow and
feel free to contact us, should you have any questions or concerns or
should you wish to place your order online or via phone. Our team is
available 24 hours a day, 7 days a week.
Here at C-W INVESTMENT LOAN SERVICE we can offer you complete
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School loan:
Construction loan:
consumers:
Home loan:
Dept loan:
Others:
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Over 25 years of experience
FILL IN this form
NAME ..........PHONE NUMBER.............
COUNTRY .......AGE......PURPOSE OF LOAN....
amount requires.........monthly income........
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Email contact: cwinvestmentloanfirm@gmail.com
Over and over again, your success is our success
LOAN wrote:
DO YOU NEED A LOAN TO PAY BILL?
DO YOU NEED FINANCIAL ASSISTANCE?
OUR. VISION IS TO MEET YOUR FINANCIAL
PROBLEM BY OFFERING YOU LOAN
LOAN OFFER
Please visit our list of products and services available bellow and
feel free to contact us, should you have any questions or concerns or
should you wish to place your order online or via phone. Our team is
available 24 hours a day, 7 days a week.
Here at C-W INVESTMENT LOAN SERVICE we can offer you complete
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School loan:
Construction loan:
consumers:
Home loan:
Dept loan:
Others:
C-W INVESTMENT LOAN SERVICE
Over 25 years of experience
FILL IN this form
NAME ..........PHONE NUMBER.............
COUNTRY .......AGE......PURPOSE OF LOAN....
amount requires.........monthly income........
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Over and over again, your success is our success
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