Should You Finance a Car When You Can Afford to Pay in Cash?
“If you can afford to pay for a car in cash, would you still opt for financing?” This question has been the source of serious and sometimes heated discussion for years. In fact, the last time we asked you guys about the best car-shopping advice you’ve received, this financing-versus-cash debate actually came up.
Frankly, though, there’s no definitive answer to this. As we’ve said over and over, there are several factors to consider when purchasing a brand-new car. You can only come up with the best decision depending on your current financial situation, and what works for you may not exactly work for others.
So, to gain more insight on the matter, we went ahead again and asked you guys what you think about this. To no surprise, the responses were a mixed bag. A lot of people gave sound advice on why financing would make more sense in the long run even if you’re liquid enough to pay for cash. Some readers, on the other hand, advised strongly against financing a vehicle.
Overall, we got a lot of sensible answers, many of which we’re certain will be able to help other readers out there who are currently in the market for a brand-new car. We’ve listed some of them down below.
Financing Over Cash Payments
“I will not pay for cash even if I can afford it. Here’s why.
“Treat a car as a utility. It is a basic expense like Meralco. You can pay a monthly of X amount without having to shell out the stowed cash. You don’t want to pay P1 million in advance to Meralco, Globe, and Maynilad for 10 years in advance, right?
“Keep it for a rainy day. I understand the interest, but think of it as a premium for keeping your cash handy and enjoying the luxuries of experiencing a brand-new car. I’ve always done this for my previous cars.
“And just in case you want to stop the monthly payments—hey, you do have that cash stashed anyway, right?” – Sieg Teo
“Never put all your eggs in one basket. If you pay half the price for down payment and the other half to invest in some other income-generating endeavor, you’ll be safe to pay the monthly, and hopefully have extra for other purposes.” – Carmelo Gaite
“If you’re not highly liquid and the money you have will earn more than the interest you’ll pay the bank for the loan, then absolutely, take out a loan for it.” — Rohn Ramirez
“Normally, even if I have the cash, it would still be based on several factors such as estimated depreciation rate of the car over time versus interest rate of the financing available, whether it’s for business or strictly personal use. But, in my current personal situation, I’d more than likely want to pay cash because I wouldn’t want to burden my loved ones with the remaining payments should I kick the bucket, so to speak, a little too soon.” – Marlon B. Boone
“Still financing. It’s a privilege for us who have a good credit score, so why not take advantage of it? I can still use my extra cash for some other priorities. [Just because] you can, [doesn’t] mean you should.” – Ron Ace
“If I can use the cash to earn for the amortization. In a few years, I [would] still have my principal and a car.” – Joel Audrey Ramos
“I’d rather invest the cash in an income-generating vessel/business that would pay for the car’s monthly amortization. That way, I get to keep my money and the car.” – VanJo Pineda
“Pretty sure one should be able to find an investment that beats the fees and interest charges of financing. Do the math (Excel is love) and it will help one decide. Then again, there are people who don’t like the feeling na may utang.” – Paolo Ylagan
“It depends. I can consider if I am quite sure of an asset that will surpass the interest rate and will give me a high return of my investment within five years.” – Jessica Fernandez
“If you know how to grow your money, financing is better. When buying in cash, you are using your own money, while in financing, you are using the bank’s money to purchase a vehicle. The vehicle and your remaining cash can be used for business or other investments and then pay the monthly loan from the income generated by the business later on. Another thing is your credit score will go up if you can finish your loan, so you can leverage more of the bank’s money to set up another business or purchase an asset.” – Miko Ebdani
“Not with a car, but with a big bike. I explored my options—dealer loan, bank loan (then pay the unit in cash), and cold cash.
“The interest rate of the bank loan was so low, it made more sense to take on a bank loan then pay the dealer in cash. Not only did I save versus a normal dealer loan by more than half, but I also earned the opportunity to strengthen my credit score. And I still have cash for other needs (especially in the event of an emergency pero wag naman sana).” – Ruemer Santillan
“If the interest is acceptable, yes. Cash flow is king. Only those who do not understand it opt to pay in cash...” – Arafat Pokaan
Cash Payments Over Financing
“Of course not. The only time you purchase on installment is on real properties, not on something that depreciates the moment it comes out of the dealership. Except if you’re going to use it commercially—that, is for business.” – Joaquin Jhay Bufi
“Let me lay down some knowledge. This is how I do it. You pay for it in cash and then finance it with the bank after. You’ll get a cash discount from the dealer and lower rates from your bank of choice. I usually keep it to two years or less also and I get a P.A. rate of 3 percent. Shop the banks around and get a rate and deal in hand before you purchase. Of course, you don’t finance the whole amount as well. Do at most 80 percent of the amount financed.” – Ulysses John
“I’d rather pay for it in cash if I have the means. Iba peace of mind kapag fully paid rather than monthly may inaalala for a few years.” – Nachie Cabantog
“If all have the riches and possibilities, definitely always pay in cash. The cost is lesser than paying through financing. No monthly hassles, and then focus more on other [productive] things.” – Gj Abaigar
“I’d rather pay in cash if I could afford to. Why would I make my car dealer richer if I could save the interest for myself instead?” – Cay Lang
“Cash. Pero more importantly, one must afford a garage before affording a car.” – Cheryl Gatdula
“Car depreciates. You pay cash on things that depreciate and do installments on real properties.” – Hannah Mae Sibul
“People always have a false sense that business will always yield to income. It is not—[there] is a fifty-fifty chance of making it or losing it all...” – Ed Gar
“Because the banks here are major causes of headache, cash all the way! We learned the very hard way...our complainants’ group is now at 300 members.” — Kathy Choy Ranoa
“Let’s exaggerate the numbers a bit: I buy a P10-million car. Down payment is at 20 percent, and the balance is P8 million. Monthly amortization is P173,000 per month on the loan. That comes to P10.3 million for the 60-month term, so P2.3 million in interest.
“So, the question is, are you okay to save P2.3 million over 60 months? Do you have any other use for it? What if you had a business opportunity that can generate 15 percent per annum (don’t even compound it)? Your P8 million can earn P1.2 million per year. So, in two years, you would have easily recovered the interest expense and yield a profit of P3.6 million.” — Kevin Carreon
Got more related advice you’d like to share? Feel free to chime in—the comments section is open anytime.
This story originally appeared on Topgear.com.ph. Minor edits have been made by Esquiremag.ph editors.