Pros and cons of car loans versus cash car sales

Pros and cons of car loans versus cash car sales

When buying a car, it’s important to consider all of your options. As well as thinking about what car you should buy, you should consider how you plan to pay for it.

There are several different options available, each with their own pros and cons, including paying cash to buy a car upfront, and taking out a car loan to be repaid over time.

Cash car sale pros

It’s relatively simple

You find a car you like. You pay the dealer or owner money. The car is now yours. What could be simpler?

Sure, the are a few more steps to make sure your new car purchase is properly registered, insured and so on, but buying a car outright means far less time and effort spent worrying about application forms and credit checks. 

Greater flexibility

Paying cash and buying a car outright means the vehicle can instantly become yours, to use as you will.

If you find a better model a couple of years down the line and want to sell up or trade in your current vehicle, the option will be available to you, without having to worry about break fees or loan repayments.

It can be cheaper 

Buying a car in one transaction can be a big deal, but it can sometimes prove less expensive in total than paying back a car loan over a long length of time.

Paying with a lump sum of cash means you don’t need to pay extra over time for fees and interest charges, so your wallet could end up better off in the long run.  

Cash car sale cons

Car choices may be limited by cost

It’s no secret that cars are often expensive, especially new vehicles. Unless you have a substantial bank balance available, some nicer cars could fall outside of your price range, leaving you to make your choice from the cheaper, less feature-packed options, which may not suit your needs, and may be at higher risk of future breakdowns.

Your cash is gone!

Because cars are expensive, you may need to put the lion’s share of the money in your savings account towards paying for one upfront. And to state the obvious, once you’ve spent this money, it’s gone.

This could potentially leave you in a tricky situation if you run into unexpected expenses such as surprise medical bills, and don’t have enough funds available to cover these costs.

Saving takes time

Unless you fortuitously come into money, building up enough cash to buy a car outright is going to take some time and dedication. Even with the help of a dedicated savings account that can grow our wealth by earning interest, you may be waiting a while before you can roll away in your new car. And the longer it takes to save, the greater the risk of financial emergency popping up when you least expect it, which could put you back at square one again.

Car loan pros

Expanded choice of vehicles
 

As long as you can comfortably afford the repayments, a car loan can help you buy more expensive vehicles than you’d realistically be able to purchase otherwise.

This can allow you to buy a car that’s better suited to your needs, one that’s renowned for reliable performance, or one with a few luxury features that can help improve your diving experience.

Build and improve your credit history

Any time you borrow money, whether for a car loan, personal loan, credit card or mortgage, the lender will check your credit history.

Buy successfully applying for and responsibly paying back a car loan, you can demonstrate to lenders that you’re a relatively safe risk, and potentially improve your likelihood of being approved for credit in the future. 

Also, with Comprehensive Credit Reporting (CCR) becoming more prevalent in Australia, positive events in your credit history (such as paying back a car loan) can help to undo some of the damage to your credit rating caused by past negative events (such as loan defaults). Over time, a carefully managed car loan could potentially contribute to repairing a bad credit rating. 

Keep your money in the bank

Rather than saving up a large sum, then emptying your bank account to buy a car, leaving you at risk of financial hardship, a car loan can let you stretch out your car payments over several years. With some careful budgeting, it’s usually possible to cover your car loan’s monthly repayments while keeping enough of your household finances available to cover everyday costs and emergency expenses.   

Also, some car loans allow you to make extra repayments and redraw these in tough times – you can get ahead on your car loan repayments without worrying about locking too much of your money into your loan in case of financial emergency.

Car loan cons

Can be more expensive overall

Borrowing the money to buy your car, then paying back your car loan over time can end up costing you more in total than if you’d just bought the car in one big purchase. As well as covering the value of the car (which depreciates over time), car loan repayments also cost you interest, and often fees.

Before applying for a car loan, it’s often worth tallying up the total cost of repayments, interest, fees and other charges, and deciding whether you’re still happy to pay this cost for your car.

Car choices may be limited by the loan

While a car loan can allow you to afford a greater variety of car options, the terms of your car loan can sometimes limit you to certain vehicles.

For example, secured car loans often use the value of the vehicle you’re purchasing as collateral to guarantee the loan – this can limit you to purchasing more expensive new cars, or particular car makes and models, so your vehicle retains its value for longer.

Unsecured car loans can usually be used to purchase any vehicle, new or used, but as they don’t require security, they’re more likely to charge higher interest rates, and to require a better credit rating to successfully apply.

May put your car at risk

Many car loans use your vehicle as security, meaning if you fail to make your repayments and default on your loan, the lender can repossess and sell your car to make up for their losses.

Defaulting on your car loan repayments often means you’re already struggling with financial hardship, but losing your car as well can make an already tough situation worse. For example, you may need a car for work, limiting your ability to get out of financial hardship, or you may struggle to meet your family commitments without the flexibility of your own vehicle.

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Learn more about car loans

What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

Where can I get a student car loan?

Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.

A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.

Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.

To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.

How much is your car worth?

If you already own a car, you could potentially bring down the cost by selling your car in the process. Before that happens, though, you’ll need to find out how much your car is worth.

One of the first places to find this value is to research the value of your current car, giving you an idea of roughly how much it’s worth in its peak condition.

There are plenty of websites that offer a free online valuation, allowing you to enter your car’s make, model, year, badge and description, with results listing a price guide based on both selling your car privately and through a dealership.

Of course, dealerships will try to profit on your trade-in by buying it for less than they can sell it, making it highly unlikely that you’ll get the same price selling a car to a dealer as you would selling a car privately.

However, private car sales can be costly and can take months to sell, making car trading more convenient with a guaranteed return, even if you may not be able to realise the total value of your car’s worth.

Remember that everything is negotiable. If the dealership is offering you less for your trade than you wanted, try to negotiate elsewhere to gain that money back. Start by negotiating on the price of the trade and then ask them if they can give you a further discount on your new car.

What are the pros and cons of guarantor car loans?

Like all things, there are positives and negatives to guarantor car loans, though one may outweigh the other depending on your needs.

Guarantor car loan pros may include that you’re more likely to be approved for a long if you have no credit or a history with bad credit, that you’re more likely to secure a car loan with a lower interest rate, and that because your guarantor car loan is based on a relationship, you will be more inclined to meet your repayment schedule.

However, there are negatives, as well. Guarantor car loan cons may include leaving a detrimental mark on a personal relationship with added strain if you don’t meet your repayments, and you may take out a loan that you can’t actually afford.

Weighing these pros and cons will give you a greater understanding of whether a guarantor loan is ideal for your circumstances.

What is a car loan?

A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.

What is an LVR?

The LVR, or loan-to-value ratio, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have an LVR of 75 per cent. LVRs change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the LVR would now be 67 per cent.

Can I buy a car as a student?

Buying a car is a huge financial decision, and shy of marriage and purchasing a house (or perhaps around the world travels), it may be the biggest financial decision you make. But if you’re looking at your empty pockets, don’t despair! Your dream of owning your own car could become a reality, if you look for and compare the right car loans for your circumstances.

Can I get a car loan with poor credit?

Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.

In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.

However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.

Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.

What is a guarantor on a car loan?

A guarantor on a car loan is a third party, usually a relative or friend, who guarantees to meet the repayments of a loan for the purchase of a car, if the borrower/owner of the car defaults on the loan.

Guarantor car loans can be useful for people who would otherwise struggle in being accepted for credit to purchase a vehicle. These may include people with bad credit, students and young people who may have no credit history, as well as some pensioners.

Many lenders offer guarantor car loans, guarantor personal loans and guarantor home loans, because of the significantly reduced risk to the lender.

How much is my car worth?

If you own a car, it may be something that can help you bring down the cost of your next vehicle purchase through its sale. However, before you can do that you’ll want to find out how much your car is worth.

Your car’s worth can depend upon various aspects, including:

  • Age
  • Condition
  • Model and make

A great starting place for aspects of this includes websites that offer online valuations, allowing you to enter your car’s make, model, year, badge and description, with the listed results displaying a price guide based on both selling your car privately and through a dealership.

Both have pros and cons, as cars can be very profitable, something that will no doubt impact any chance you have to make the most of your car’s value upon sale. Dealerships will try to profit on your trade-in by buying it for less than they can sell it for, so you shouldn’t expect the same price selling a car to a dealer that you would necessarily get selling a car privately.

What is a guarantor car loan?

A guarantor car loan is a type of loan that features a guarantor on the agreement. The guarantor is a third-party individual, often a friend or relative, who guarantees the loan will be repaid if the borrower defaults on the car loan.

Guarantor car loans are often geared at people who might otherwise struggle being accepted for a secured car loan when purchasing a vehicle. Some of the reasons might include a lack of credit history such as with a student or young person, if there’s bad credit, or age as a factor such as with pensioners.

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

How to find a great car loan

Historically, finding a great car loan would require excess research ranging from visiting an excess of websites or making phone calls, but technology has moved on. Using RateCity, Australia’s leading financial comparison service, you can check out great deals from a range of lenders on the one site.

To start, select the amount you want to borrow and the length of the loan, narrowing your search to show just fixed or variable interest rate results.

Once you’ve indicated your search criteria, you’ll see an immediate list of lenders, ranked by interest rate or application fees. You’ll also be able to view the monthly repayment amount for each result, helping you to know what you can afford.

Up to six products can be compared side-by-side, complete with more information about each car loan, giving you more information about your options.

When comparing your car loan options, it’s ideal to keep in mind some points find a great car loan for your needs. Consider the following:

  • Choosing a low interest car loan can reduce costs
  • Selecting an option with low fees and charges is ideal, because these can really add up
  • Be aware of penalties, such as early exit penalties if you pay off the loan sooner than expected
  • Consider the features that best suit your situation

There are many ways to ensure that you get a great car loan. Ultimately, you’ll end up with the best deal by doing your research and selecting the most suitable product for you.

Can I get a discounted student car loan?

Being a student is tough enough, and while you might find the odd student discount on movies and technology, the same can’t be said about car loans, as you can’t really get a discounted student car loan.

Lenders make money on the interest and fees that they charge with loans, and the lowest interest and fees are given to the most reliable credit holders: people with excellent credit history.

As a student, you are unlikely to have enough on your credit report to warrant an excellent history. There are however, ways of getting a lower interest car loan if you can’t get an interest-free loan from the bank of mum and dad. One way of doing this may be through getting a guarantor car loan, which can get you a secured car loan by setting your parents up as guarantors.