Cash Or Loan For Your Next Vehicle

By Author: David Burton
Total Articles: 49
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Paying cash or taking out finanace when purchasing a vehicle is a big decision and involves a lot of money. There's always the questions of whether to go used or new, buy or lease, finance through the dealership or the bank or to even pay cash and avoid payments. On the matter of automobile loans it seems like they've really become a part of everyday life; it would almost seem strange not to have a monthly payment. We've become use to the idea of a loan that allows us to enjoy a car sooner than we might have been able to. But how much do we pay for that convenience?So what does taking a 5%, 60-month loan actually costs you over 5 years:With $5,000 down payment with a loan of 5% over 5 yrs equates to a loan balance of about $15,000 = $2,025 in interestWithout the down payment and a starting balance of $20,000 = $2,685 in interestNot a huge difference, but the down payment dropped the monthly payment by $100. In both situations, the cost of the loan would run about 13.5% of the loan value. You can think of that 13.5% as a hidden tax on the car, which is more than the sales tax and other fees that get tacked on. Over a lifetime ...
... those interest payments can really add up. Aside from leasing, buying a car outright is your only other option. Why don't we buy new cars with cash more often?Because we are in a "I want it now" world,you could pay $330 dollars each month into a high-yield savings account for 5 years and buy a truck without getting a loan and saving yourself over $2000 dollars and earning interest on your deposit in the process. So why don't you? Mostly because people want a new vehicle sooner than later. You could even have replaced your car with a newer used car .The trade-in acting as a down payment is what keeps this from being outrageous, actually these numbers don't seem too bad. $21,500 in interest payments over a lifetime isn't too big of a deal. To accomplish the task of providing our own financing we have to delay our gratification and save. For the 5 years prior to a car purchase, we deposit the total cost of $60 into a high yield savings account every month, about $333 for a $20,000 car. The interest earned on the savings earmarked for a new car can be transfered to other investments for additional growth after the purchase. So by delaying the first car purchase and continuing that discipline we've saved $21,500 in interest payments, or have we?What would happen if we took every dollar we would be giving to a bank in interest and invested it in a Roth IRA (all contributions and earnings can be pulled out tax-free during retirement). $21,500 over 50 years is $430 a year, $36 a month. That's money we'd normally be giving away so why not invest it instead. Let's say our IRA starts with a $0 balance, grows at 8% and we don't worry about inflation yet.Total invested = $21,500 Simple earnings = $43,860 Compund earnings = $201,099 Total account value after 50 years = $266,459 .This tho is a hypothetical situation, but the outcome and general idea are pretty clear. By delaying a car purchase and avoiding interest payments we are presented with the opportunity for terrific growth over the long term. Even without investing the difference you can save a good chunk of change. This scenario doesn't take into consideration a longer period between purchases or the possibility of buying used cars, both of which would allow more income to be directed towards investments.This is not the absolute best way to purchase cars, but the hidden costs of automobile loans aren't apparent until you crunch some numbers.

Dave Burton
www.bargain-motors.com
Dave resides from London England is a former engineer who is now moving into the motor trade and computer technology ,and also the owner of the web site http://www.bargain-motors.com