Finance Car Or Pay In Cash?

Added March 23, 2009 by Ilyce R. Glink

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Summary: A prospective car buyer has saved enough to buy his next automobile in cash, but is considering financing it to build on his already-good credit. A car loan isn’t needed to keep your credit in great shape. If you’re able to buy a car with cash, you can use the Internet to research and negotiate and ensure you still get a great deal.

Q: I love your show and try to listen to it as much as possible, and although the question below may not be in your realm of expertise any feedback you can give me would be greatly appreciated.

I am thinking about purchasing a new car to replace my 12 year old Honda Civic which is on its last legs (so to speak).

I have not had a car note in about 12 years and when I first bought my Honda I had it paid for in full within the 1st year that I had it, and now I want to buy a new car and pay for it in full on the day that I go to the dealership. However, my wife has been telling me that I should take out a four year loan and build up some credit, but I hate having to think about making a monthly car payment for the next 4 years especially since I don't think that my credit is in bad standing, in fact it’s in very good standing. Plus, if I pay for it in full then I can still take part of that money and put it into a money market account and also put aside the other half for future car maintenance, repairs, and annual auto insurance.

What do you think, do you think it would be better for me to take out a loan, or is it best to go ahead and pay for the car in full since I have the money to do so? Also, if I decide to pay for the car in full, are there any special precautions I should know about? What is the best way to go about paying for the car in full? I love that you've saved up enough to buy your next car for cash. And, since you keep your cars for a long time (my Honda was 12 years old before I bought a new one), it pays to buy a new car and get the extended warranty.

A: What you want to do is first figure out what car you want to buy and then shop it around to dealers and through the Internet. Once you know what you want to pay for the car, you can use that knowledge to negotiate with the dealer for the new car. Once you have that price fixed, offer to sell your existing car (first, go to your local CarMaxx to find out how much your car is worth). You don't want to tie your new car to your old car, but you may save on the sales tax if they are willing to use your trade-in to reduce the purchase price.

Get a bank or certified check for the amount, or consider putting part on your credit card (to pay off immediately) to get miles or cash back.

By the way, I completely disagree with your wife's contention that having a car loan will increase your credit score. As long as you make occasional charges on your credit cards, and pay your mortgage on time, your credit history will be in great shape.

Good luck with the car, and thanks for listening to me on Newstalk 750 WSB.

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