Although it’s won’t be your most expensive purchase in your lifetime; buying a car will likely be up there. Shelling out thousands or even tens of thousands for the car that will get your from point A to point B will hopefully not be a decision you make lightly. After you’ve spent the time picking out the make/model and it comes time to actually pull the trigger, you’ll likely have to decide whether to get a loan or to pay cash. It’ll certainly seem daunting writing a check for $10,000 (or more) and the easy way out may be to get a loan where you pay like $250/month for 36 months. There are a lot of financial bloggers out there that will advise you to take a loan, and then there’s a lot of bloggers that say PAY CASH. Hopefully it’ll be no surprise where this financial blogger sides with that debate. Even to the admonishment of some of my in-laws (shout-out!), I still think it’s better to pay cash. I’ll hopefully dispel this myth of always getting a loan by talking through 3 pretty common reasons for why people advise getting a car loan.

It’ll help my credit score

Some people think that by getting a car loan and making consistent payments on it each month, it’ll improve their credit score. There are a number of issues that I take with this statement. Firstly; do you know what your credit score even is right now? It might be good enough already. Secondly; for what reason do you want to improve your score? By just having good credit history with a credit card, I was able to buy a house (no auto loan required). For most people, that will likely be their greatest need of a credit score, and you honestly should be fine without getting an auto loan. Your credit score is determined based on a number of factors: Payment history (how often you make your payments on time), Outstanding debt (how much you still owe divided by the total amount you have access to, i.e. credit card limit), Length of history (one month vs. one year vs. ten years), inquires/new accounts (how often you apply for new credit) and the types of credit. Assuming you have solid history with your credit cards, the only way your score could really go up that much is with the types of credit part of the credit score. The types of credit factor only makes up 10% of your credit score, so it really may or may not go up that much. Finally, what happens if you miss a payment or are late? What happens if the payments get a little too hard to manage and you pay only the minimum? It’s no guarantee that getting an auto loan will help your credit score; in fact you may be putting yourself at risk to lower your score! If you’re truly worried about your score and looking to bring it up, stick with your existing credit cards. Pay them off and build up your score that way. If credit cards got you into trouble and lowered your score, what makes you think you can manage another form of credit? *See my article on getting a car loan to improve my credit score  or how does my credit score work for more info!

Spending all that money puts me in financial risk

This thinking goes that if you’ve got $10,000 in the bank to buy a car, why would you spend it all at once and leave yourself vulnerable to future financial situations that pop up? People tend to think it’s better to keep that money in the bank for emergencies and to pay a small amount each month. I tend to think that people that think this way probably shouldn’t be buying a new (or used) car. I’m a big advocate of having both an emergency fund (for those emergencies people worry about) and a savings account. By having a nice cushion set aside, I don’t have to worry about paying $10,000 cash. If a true emergency came up, I’d be ok (emergency fund!). Although auto loans comes pretty affordable these days (1-2% interest), that’s still in my opinion an unnecessary fee to be paying. By paying cash up front, you can save hundreds on the back end. As nice as paying $199 a month sounds, you will pay for this convenience, in the form of interest. If something did come up and I wasn’t able to make payments, I’d likely have to sell the car. Nothing is stopping me from doing this if I paid cash up front. Paired with the ability to sell the car at anytime and the emergency fund/savings cushion, I personally don’t think you should get a car loan to protect yourself from emergencies.

I can use my money elsewhere in a smarter way

“I can get an auto loan and pay 2% interest, while I can earn more than that in the stock market.” Well good for you! This is a tough one to dispel because on paper it works. You should use your money in the manner that gives you the best return. If you can earn 3% with your money in the stock market and pay 2% for a car loan, you’ll be 1% better off. Not bad! Only problem with this is that there’s no guarantee of such returns. We’re no strangers to seeing the economy falter and fall, and 2008 should be a little too familiar to us (market fell 30%). The only guarantee would be US Treasury bonds or a savings account. The best savings account that I can find out there pays right around 1%. Sure you could invest your car money in the stock market and earn a better return…or you might not. There’s just no guarantee of a good return. Financially sound people tend to be risk mitigators. I wouldn’t say I’m risk averse as I do invest heavily in the stock market; both my retirement and then some of my general savings. What I do avoid is unnecessary risks. If I don’t have to go into debt, I don’t. Although there will always be people that try to tell you that buying a car with a loan is the way to go, they all work for a bank/finance company. Ha! Just kidding. I personally believe that getting a car loan isn’t the smartest move with your money. It sets you up with a financial liability, which is a risk and it can often be indicative of a deeper financial problem. If you don’t have the money now for a car, should you really be buying one? If you do have the money, what is your hesitation for spending all the cash now? Buying a car is certainly a fun experience but just be sure to do your homework before hand!

Thanks for reading! Happy Holidays from YoungMoneyFinance!