Although your goal should always be to become debt-free, you can often find a better deal on a vehicle if you finance it rather than pay cash. Part of the reason financing a car benefits you is the opportunity cost you incur by putting your money in a car rather than an appreciating investment. However, you have to factor in other considerations, such as the amount of savings you have and interest rate on a car loan.
Zero Percent Financing
Car dealers often offer the option of zero percent financing or a cash rebate. The initial thought of lowering the car's price might tempt you, but you may save more money by financing and putting your car allowance in an investment. If you take a rebate -- say $3,500 off a $25,000 car -- you save only $25 because you could have put the money you paid for the car in a CD investment that returns 5 percent annually, which would equal about $3,475 over the life of a typical auto loan.
You may not get the best price on the car if you state upfront that you plan to pay in cash, because dealers receive extra commission when they get you to take out a loan, according to David Kiley of DailyFinance. You have another option: leasing. Leasing usually costs less than financing and the vehicle is under warranty for most of the lease, so you don't have to pay for repairs. If you like to change cars every few years, leasing is the best option, according to Colin Bird of Cars.com.
Paying cash for a vehicle eliminates some tax deductions. For instance, if you use a leased vehicle for your business, you almost always can deduct some of the costs of using the car for work. If you own a home, you can use a home equity loan to purchase the vehicle and deduct up to $100,000 in interest payments.
The best way to get the lowest price possible on a car is to be a ready, willing and able customer, according to Wiley. Car dealers want to close deals as soon as possible. If you choose to finance, find a pre-approved car loan and carry the title to any trade-in into negotiations. However, assess your financial situation before you buy your car. A cash purchase may garner the best deal, but if you have to use all of your savings, you put yourself in a position of potential financial ruin in case of a hardship, such as unemployment. Check the Web for a car financing calculator. Enter your data, such as down payment and interest, and the calculator can tell you which option costs less (see Resources).