Pros & Cons of Financing a Car

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Financing your next car could prove to be a good move or a bad one.
Financing your next car could prove to be a good move or a bad one. (Image: luxury car - model toy car image by alma_sacra from Fotolia.com)

You may have seen TV commercials, radio ads or newspaper ads from companies offering to help finance your car. If you’re in the market for a car, you’ve probably asked yourself if getting an auto loan is worth it or not. The answer depends on your financial status and whether or not you can afford a car loan.

Credit Score

When you finance a car, you affect your credit score either in a positive way or negative way. If you consistently make your monthly payments, then your credit score will increase (assuming you’re not hurting your score elsewhere). If you don’t make your payments, however, your credit score will decrease. As long as you can afford the monthly payments, then financing a car will help your score in the long run. If you doubt your ability to make the payments, then buying a less expensive car with cash is probably the way to go.

Debt

While financing a car looks good on your credit score as long as you make the payments, it’s not going to look good in your bank account. Car loans are considered unpaid debt, which can cause problems if your job is not secure or you do not have a large savings fund. Paying cash for a car removes the debt factor, because you don't need to pay anything else (repairs notwithstanding). Unless you qualify for zero percent interest rates, you will also pay more for the car with a loan than if you paid in cash, due to interest.

Warranty

Almost all new cars come with a warranty, some as long as 100,000 miles. Warranties allow you to relax if something happens to your car, such as a $3,000 transmission problem. Warranties are especially important on used cars, because the reliability of a used car is typically less than a new car.

Insurance

When you sign the loan papers, you agree to pay back the financial company or bank for the amount of the loan. You also agree to do it on their terms, which usually means that you must purchase comprehensive car insurance. Comprehensive auto insurance covers your car in case of any damages and anyone involved in the accident. The cost of comprehensive coverage depends on the auto insurance company, but typically costs significantly more than just purchasing liability insurance. You normally cannot drop comprehensive insurance until you pay back the loan.

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