In the previous posts from the series, we’ve identified why would we spend money on a new car, when is the right moment to do it, and how to choose the most reliable one. That pretty much sums up most of the experience. However, the moment you selected a make and a model, it’s time to identify how are you going to be paying for your new car.
There are a few options: you can pay it in cash, lease it, or finance it. Every one of these is having pros and cons. However, only one would be the right fit for you. Your choice depends on your financial status at the moment before the purchase.
Paying in cash for your new car
You can always pay for your new car in cash. However, this means that you will be paying money for an asset that will depreciate in value the moment you drive away with it. It’s just how it works and you can barely do anything about it.
If the car’s price is only a small fraction of your net worth and there’s no smarter way to spend your money at the moment, then go for it. I doubt there isn’t anything to invest your money in at the moment, but you probably know best. Yet, think about investing that cash into an S&P500 index fund. This move will make you money, instead of taking them away.
Even if you’re not so much into investing, then you can still find high yield savings account with at least 5% compound interest and put that cash in there. However, it’s not that hard to find a brokerage account and start investing yourself.
Why would you lease your new car?
Well, leasing isn’t much like paying for your new car, because you’re not going to be paying to own it. Essentially, you will be paying to rent it for a specific period of time. Most companies will ask you to sign a 2-year contract and will put a limit to your yearly mileage. Mileage is in tiers, so the more you’re driving, the more you will be paying for your new car.
Since you’re actually renting the car for 2 years and then returning it back to the dealership, your payments will be about 2-3 times more than financing it. That’s because the dealership actually takes all the costs from the depreciation of the car. Depending on the contract, your car might be coming with summer and winter tires, free service, and others.
Is leasing for you? That’s for you to say. If you’re an expat in a foreign country or running a business and would like to drive the overall cost and taxes low, this might be it. There are certain details that you need to take into account – tires, servicing, taxes, etc. Just look at your contract and write down everything that’s not in there on a separate piece of paper. Then look up the costs of all of that. Does it still make sense to lease your new car?
Financing your new car
This is probably one of the most popular ways for people to be paying for a new car. You are required to put down 10% or 20% as a downpayment and pay the rest on a monthly basis for the next 3-5 (or more) years. In our country, there’s also an outstanding value due for payment 1 or 2 years after the last monthly payment. How much that value is, is something you as a buyer choose when buying the car.
Usually, the outstanding value is between 10% and 20% and you can decide not to pay it, but return your car to the dealership and sign a new contract for the newer model. If you’re happy with your car, that’s a good opportunity to drive the newest model. However, you will be stick with the same carmaker for a decade (in some cases), which might be boring.
Paying for your new car this way offers a good amount of flexibility. You’re able to put down more as an initial payment and drive the sum of your monthly payments down. This may help your budget feel the car payments not as heavy or to allow you to pay for your car sooner.
Paying for your new car the smart way
If you are having a passive income that could cover your monthly payments for a financed car, I think that would be the best. In such a case, you will be thinking only for the initial downpayment and the outstanding value that is left to be paid. Since you will rely on your passive income to be paying for your new car, you can continue investing or working on your side hustle.
That way you will be driving a new car for which your passive income is paying while building up your wealth. Adding up to your investment portfolio or side hustle will further increase your passive income, which you could dedicate to something else. I would say this is a win-win situation and one of my life goals.
There are probably other ways to pay for your new car. It depends on you and your financial status and situation which would be the right one. Think about all of the options and do it the smart way. If you can’t find a way, downsize your car requirements or just wait till you can afford it!
Are you thinking about buying a new car? Let us know in the comments down below!
Buying a new car series: