About two years ago, I did what many financial gurus would tell you is the worst financial decision you can make: I bought a new car. Now, we could sit here and argue back and forth all day about why I chose this route over getting a used or certified pre-owned car, but I think the decision was right for me at the time. (I’m sure this will be the topic of future posts as well!).
NPR recently reported some statistics which showed that Americans are taking on riskier and more expensive loans to finance fancier and more expensive cars. Taking out a car loan, even when you can buy your car outright with cash, isn’t necessarily a bad financial decision. Here’s why I chose to finance my car and put my money elsewhere, instead of on a big down payment.
First off, my money was better spent elsewhere. When I purchased my car (about $12,500 after my trade in and other incentives), I still had about $25,000 in student loan debt. The average interest rate on these loans hovered just above 6% over a 10 year term. The car loan I got through the manufacturer was about 2% for a 5 year term. Even if I could afford to buy the car with cash (I couldn’t), it made more sense to pay down my higher interest loans first.
It also made more sense to finance because it would improve my credit score. We recently wrote about how your credit score is determined and ways to improve it. One aspect of your score is the diversity in the types of credit you hold. Adding a car loan will help improve your score in that regard. This is, of course, assuming that the you can comfortably fit the car payments into your budget. Keep in mind, the amount of debt you carry can actually have a negative impact on your score. Make sure you can balance the loan with your existing payments and are not taking on an unreasonable amount of debt. You don’t want a new car to hurt your score more than it helps.
The final reason I financed my car was the great dealer incentives I received. The dealership I purchased through offered $1500 cash back for financing through them. They also offered an additional $400 off of the principal balance as a recent college graduate. For those of you doing the math at home, that means the incentives they offered were worth more than the total interest I would pay over the life of the loan! Additionally, the dealer offered perks such as free state inspections and the occasional free oil change.
Some people may not agree that financing a car is ever a wise financial move. And maybe it doesn’t work for everyone. If you cannot afford the payment, it is always better to find something within your budget. Give us a shout out in the comments with your thoughts. Do you agree with what I did? Did you buy a new or used car after college? What has and hasn’t worked for you?