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Should I Use A Car Loan Or Purchase A Car Outright?

Katie Francis

Katie Francis

October 13, 20213 minute read
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Whether you’re buying new or secondhand, a car is an expensive investment. Not only do you need to consider the initial costs of buying, but you also have to factor in the hidden costs such as regular maintenance, petrol, insurance, and registration.

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    If you’re wondering whether you should take out a car loan or empty your savings account, you’re best off wrapping your head around both options before deciding. They both have their advantages and disadvantages, so you should consider which suits your long-term financial goals best.

    Car loans

    A car loan is a popular way to finance a new car while staying financially afloat. Loans can make the process much more financially manageable, while also giving you a great opportunity to boost your financial portfolio. However, there are things to consider when taking out a personal loan, especially if you already have debt. There are also different types of car loans to choose from, so it’s important to understand what each of them offer.

    Pros and cons of car loans

    Pros Cons
    • Manageable, recurring payments (usually automatic);
    • Typically less restrictive than cash when choosing a make and model, depending on your loan amount. For example, you might have $15,000 saved up for a car but by taking out a $20,000 loan, you can have more freedom to choose a more premium model than you would be able to afford by using only your savings;
    • Builds credit history.
    • Additional fees and charges (interest rates, establishment fees, early repayment fees, etc.);
    • Can result in higher insurance rates (if choosing a secured loan);
    • No outright ownership of the vehicle until loan is paid off;
    • Taking out personal finance for a depreciating asset.

    If you’re considering financing a car, there’s more than one way to do it. You can apply for a loan through a dealership or your bank, or shop around to find a good deal with an online lender. It’s important to be picky with choosing a good loan term, as you can easily get taken for a ride with hidden charges and early exit fees.

    Purchasing a car outright

    If you’ve been saving for years, buying a vehicle outright is a huge accomplishment and can feel incredibly rewarding. However, it can also be daunting, especially if the majority of your savings will be going towards the purchase. This could leave you financially vulnerable if an unforeseen expense pops up, and may lead to financial hardship. But, if you’re confident you’ll have enough money set aside for a rainy day, purchasing outright might not be a bad option.

    Pros and cons of purchasing a car outright

    Pros Cons
    • No debt obligation;
    • Straightforward process, as it avoids loan contracts and approval wait times;
    • No early exit fees if wanting to trade in or sell within the first few years;
    • Typically easier to negotiate price when dealerships know you’re paying in cash.
    • Limited to models in your exact price range;
    • May cause financial stress if you don’t have any emergency funds set aside.

    People can be wary about spending their hard-earned savings on a depreciating asset. In many cases, people who have plenty of money set aside will still choose to finance a car, as they see more value in putting their savings towards a mortgage or an another form of appreciating asset.

    How to choose between a loan and purchasing outright?

    There are advantages and disadvantages of both car loans and purchasing a car outright. While you might avoid additional fees by purchasing outright, you’re also putting yourself at risk of financial hardship if you find yourself in need of cash. On the other hand, a loan can drag the repayment process on for years and have you paying lots more in interest. No matter what path you choose, there’s ways to ensure your purchase goes smoothly.

    Copyright © www.jacarandafinance.com.au Jacaranda Finance Pty Ltd ® ABN 53 162 078 195 Australian Credit Licence 456 404, Pawnbroking License Number 4221738. The information on this web-page is general information and does not take into account your objectives, financial situation or needs. Information provided on this website is general in nature and does not constitute financial advice.

    Katie Francis
    Katie Francis

    Written by Katie Francis

    Katie Francis is a Content Writer at Jacaranda Finance. She is currently studying a Bachelor of Business (Marketing)/Media & Communications at the Queensland University of Technology.

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