When you plan to buy a new car, you are generally left with two options – loan or cash payment. We discuss the pros and cons of each.
While buying a new car, does it make sense to take a loan or pay by cash? Let us analyse the advantages and disadvantages of each. Buying a car is among the biggest occasions of one’s life. People almost always stretch their budgets to get their dream car. Also, an overtly large number of people buy cars on EMIs. Hence, they are not necessarily on a strict budget. Resultantly, they end up buying a car that is way beyond their means. That could be a blunder in the long run. Here are the pros and cons of buying a car on loan or cash.
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Buying Car on Loan
If you purchase a car on loan, you will need to make a small downpayment, generally around 15% of the total cost and finance the rest of the amount from a bank. After setting the interest repayment duration conditions, you will need to pay EMI every month for the next 3, 5 or 7 years. During this duration, the car doesn’t technically belong to you. If you default on a few EMIs, the bank reserves the right to take the vehicle away and auction it to repay the loan amount. That is a constant source of worry for people.
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On the other hand, this gives you the flexibility to choose a car that is way beyond your budget in the sense that you can buy a more expensive car since you will repay the amount over the next few years. Therefore, the choice of cars increases. Also, if you take a loan and have a decent repayment habit, your CIBIL score increases. That makes you more credit-worthy for any loans you might have to take in the future. That is a positive. Finally, you get to keep your savings through which you could earn interest that you are paying for the loan by investing smartly or keeping it as your emergency funds.
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Buying Car on Cash
The not-so-common way of buying a car is full payment with cash. The main advantage of that is the fact that you have complete peace of mind since the entire process is done just in one day. You get complete ownership of the car from day 1. Even if you don’t work or have a financial crisis, the car belongs to you and could serve as an asset rather than a liability. You could sell it off at any time without any fuss. Also, you are not paying interest because there is no loan from a bank. Hence, you get the car at the cheapest price possible.
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On the other hand, you are restricted in terms of which car you can afford because you have a fixed amount of cash. Therefore, even if the car is slightly more expensive, you can’t buy it. Furthermore, paying a lot of cash in one go leaves you with less or no savings. Therefore, you must make that decision wisely. In essence, the final decision depends on the individuals. We have listed out the pros and cons of both. You must do your due diligence and understand which one makes more sense to you according to the financial situation of you and your family.
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