Get a Car Loan or Pay Cash?

Get a Car Loan or Pay Cash?

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Should you get a car loan or pay cash?

If you've got the time to plan ahead, saving for your ideal car can save you a lot of money in the long run. The problem arises when you are in a hurry to buy a new car.

Here's a look at the pros and cons of saving cash, or taking out a car loan:

Advantages of a car loan

If you have a regular income, getting a car loan can get you into a car that's nicer than you could afford if you use the cash you have saved.

  1. No waiting to buy your car

    With a car loan you won't need to spend months or years saving for your car - you can look for your car as soon as you have a pre-approval.

  2. Keep savings in the bank

    For a private individual, it's important to have a savings buffer in the bank for unexpected circumstances.

    If you're a business, then a car loan can help with maintaining your cashflow and keeping the business running smoothly.

  3. Get a nicer car

    With a car loan, you can often borrow a little more than you'd be able to save. This means you can get that sunroof, alloy wheels, or the 4WD you need, no compromises.

  4. Pay it back quickly

    If your alternative to a car loan is a mortgage redraw, a car loan will work out cheaper. While mortgage interest rates are generally low, the loan term is often 15-30 years. A car loan has a slightly higher interest, but you pay it back quickly.

Downsides to a car loan

The biggest hassle of getting a car loan is that it's a contract that you'll have to uphold for three to seven years.

  1. Commitment to make car loan payments over a set number of years

    In exchange for interest and fees, you get a lump sum to buy a car right now, but you'll be locked into making payments for the length of the car loan. This means you need to ensure you've got a steady income.

    If you do want to pay out the car loan early, you might have to pay an early payout fee.

  2. The lender determines how much you can spend.

    During the car loan application process, the lender will determine how much they believe you can afford to repay. You'll have to choose a car within this budget.

  3. Selling the car is more complicated

    If your needs change and you have to sell the car before your car loan is up, you need to have permission from the lender. Funds from the sale will be used to pay out the loan.

  4. Bank fees, interest and an application fee

    There's a cost to borrowing money, and you pay for the loan through the application fee, interest and any account fees that fall due during the loan term.

Advantages of saving cash

Saving cash is ideal if you have the time and you can prioritise your car purchase over any other financial obligations that you have. Here are the key benefits:

  1. Own the car 100 per cent, right away.

    Buying with cash keeps things mega simple. You pay the money, you buy the car, and it's 100 per cent yours. You'll be responsible for insuring it and paying registration, and if you decide to sell it, the price you get for it is yours to do what you like with.

  2. No application fees or interest

    The price of the car is the only cost that you have to worry about. No application fees, interest or ongoing account keeping fees.

  3. Keeps the transaction simple

    When you pay cash once there's no ongoing obligations.

Downsides to buying with cash

The biggest hitch to buying your car with cash is that you've got to have the cash on hand at the time.

  1. You've got to have cash on hand.

    If your current car has bitten the dust and you need a new car right away, there's no time to save up for your car and pay in cash. Although you could catch the bus and ride your bike around while you save up.

  2. Opportunity cost - you can only spend your cash once.

    If you do have a healthy savings balance, you still might not want to drain it for the cash you'll need to purchase a car. If you spend the money on the car, it's not available for other purposes. It is important to have an emergency savings buffer, even if it's a small one.

The final choice: should you get a car loan or buy with cash?

If you're in permanent employment, and you're planning to stay in your role for a few years, buying a car using a car loan can be a great idea. It means that you can use your savings for other things like travel, building your house deposit, and investing for your future.

Just be sure to create your new budget to include your car loan payments as well as vehicle running costs.

If you are able to save a lump sum to buy a car outright, this means all your future income can be devoted to other purposes - you'll own the car 100 per cent. It's a smart option if you're considering changing careers, you do contract work or have a casual position.

You can get an obligation free quote for a car loan any time to help you to compare your options, or to get out shopping for the car you need sooner.

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