There’s no time like the present to take a look at your vehicle and decide if it’s time for an upgrade. In recent years, the automotive industry has taken great steps forward in technology, safety and comfort — perhaps you want to reward yourself with something more modern.

According to Consumer Reports, the average price of a new car in 2022 is $47,000. Many people don’t have that kind of money sitting around to pay cash for a vehicle, but financing makes budgeting sense for some.

What Is Financing?

Financing means borrowing money from a lending institution to purchase a new or used car in exchange for fees and interest payments. Financing can be arranged through a variety of resources, including credit unions, banks, online lenders and directly through car dealerships. Monthly rates are primarily dependent on:

  • Applicant’s credit score
  • Length of the loan
  • Down payment amount

Most auto loans have terms in 12-month increments, ranging from 24- to 72-months. But there are also loans available with even longer terms, which usually translates to a lower monthly payment. Financing a vehicle allows a vehicle buyer to spread a large up-front cost out across several years for decreased budget impact. 

Why Finance? 

Limited Cash Resources

This is perhaps the most obvious reason why financing may fit your budget needs. Financing would enable you to get into a new vehicle without having available cash or putting a huge dent in your savings account.

Expanded Vehicle Choices

Instead of being limited to a fixed dollar amount of cash on hand, a financed purchase allows for greater flexibility when it comes to the year, mileage, trim and options. Using available cash as a down payment and financing the rest allows you to expand your search to newer, more reliable vehicles with lower mileage and more options.

Alternative Uses for Cash

A cash purchase effectively ties up resources in a single asset. Alternatively, those same funds could be put to use investing in other opportunities like the stock market. Cash could also be used to pay down high-interest debt from credit cards. The average credit card interest rate is between 14.51% and 18.26% today, which is significantly higher than most vehicle loan rates.

Low Interest Rates

Depending on the term of the loan and the buyer’s credit score, vehicle loans can be found as low as 2% and sometimes even lower. That fee equates to a comparatively small service charge over the life of the loan.

Less Concern About Depreciation

The minute a new vehicle leaves the dealership lot, it takes a hit in value. Experian states that most new cars depreciate by 20% in the first year. The lower the initial financial outlay, the less likely you’ll be concerned about resale value if you decide to sell again in the near future.

Credit Boost

Initially, taking out a car loan can cause a reduction in credit score anywhere from five to ten points because of the loan being reported to credit bureaus. However, if loan payments are made in a timely fashion, that initial drop is reversed. For example, a FICO credit score factors in payment history as 35% of the overall score. Demonstrating proper payment cadence illustrates that you are consistent and reliable. Over the long term, your score will be influenced accordingly.

Takeaways

Ultimately, the decision on whether to finance a vehicle comes down to an evaluation on opportunity cost. Are there better things you can be doing with your money than tying it up in a vehicle? 

For a look at the flip side of this argument, take a look at KSL Cars’ recent article on why a cash purchase may make more sense. Then, decide which strategy most closely aligns with your own financial situation. Online resources such as a loan payment calculator may help with the number-crunching.

If you’ve decided you’re ready to upgrade to a new or used vehicle, check out the vehicle listings on KSL Cars to find your next ride. With over 50,000 listings from both dealerships and private sellers, there is bound to be something that catches your eye.