You may have heard your grandparents talk about paying cash for major purchases like their cars and houses. Maybe your parents paid cash for their cars as well. You may see that as old-fashioned, especially since financing has become so normalized. But paying cash for a vehicle is still the best way to purchase one, as it can save you thousands of dollars in the long run.
Saving up for the total cost of a car might feel like an unattainable goal, but it is possible and is certainly more financially beneficial than taking out a loan. We came up with the top three reasons saving for a car is far better than financing one:
1. Zero Interest
It’s easy to find the appeal in the steady monthly payments of a car note, but how often do you consider the impact of interest every month? With a drawn-out car loan, you can expect to pay upward of $2,000–$3,000, or more, in interest alone. What if you looked at your savings deposits as a car payment instead?
Consider how much needs to be allocated every month to finance a new or new-to-you car, and instead of paying it toward a loan, put it away in savings. Plan out these payments ahead of time so it’s regular and easy to follow over the course of a couple of years. Try to avoid dipping into your savings account, and make sure to have some savings off to the side to address any emergencies while you save for your new car.
It’s also important to consider that the thrill of driving a new car dissipates after a while and that those car loan payments with interest can start to feel burdensome. Plus, that vehicle loses value as soon as it rolls off the lot and constantly depreciates over time.
2. One Less Payment
Lenders can offer long(er) term financing options, such as a five-year auto loan, for people without perfect credit or those looking for an affordable monthly payment. For many of us, we are currently locked into a car loan and desperately want to get into a better vehicle. Try to resist the urge to “upgrade” and take on a new payment. Make a commitment to yourself to pay off that current loan first. Once it is paid off, keep driving that car and put the money that was allocated to the monthly payment on the old loan into savings instead. Treat it as if the car loan is still stuck with you.
It’s understandable if the old vehicle finally gives up and forces you to prematurely look for a new vehicle. In that event, you will have your car savings fund to use toward a down payment on a new vehicle or to fix the old one. Setbacks are a fact of life, but sticking to your savings plan is a slow-and-steady race that pays off every time.
3. Save on Unseen Costs
Do you consider the added costs of purchasing a new vehicle? Buying a car impacts our budget in more ways than one. Fuel costs, insurance, breakdowns, and regular maintenance should all be reconciled with your budget before making that next auto purchase. You can mitigate the impact these things have on your monthly budget by saving for a vehicle rather than financing. Simple tricks like prepaying your car insurance by six months is a great way to plan ahead too.
Remember, when financing a car, you are committing to a monthly payment that you will likely be stuck with long after the excitement of the purchase fades. The best course of action is to save ahead for your next car purchase. Ultimately, the car that brings you the most joy is the one that’s paid off.