Buying vs Financing a Car
When it comes to most consumer goods, finding the best deal is generally straightforward—it’s a matter of comparing price tags. Yet with cars, it couldn’t be more complicated. Not only does the make and model matter, but if it’s a used car, there are nebulous factors too, like how gently or rough it was driven over the previous years (something that’s difficult to quantify).
On top of all these factors, there’s also the payment model to consider. To find a car that meets your needs for the lowest total cost, one of the first steps is deciding whether to buy a car outright or opt for financing.
Which is right for you? Let’s break it down.
Option 1: Buying a Car
Paying for a car in full is more common for used cars—while about 45% of used car buyers pay cash, only 14% of new cars are purchased with no financing.[1] It may seem like a simple decision: if you have the money, pay it; if you don’t, finance it. But there are still pros and cons to buying a car outright.
Some questions to consider before buying a car:
- For an older used car, can you afford to pay for potential repairs it may need?
- How high do safety concerns (i.e., potential breakdowns) rate for you?
- Will you be driving in locations with easy access to towing and repairs?
- How many miles do you anticipate driving?
Once you consider these questions, select a range of makes and models that fit your needs and identify your preferences for model year and maximum mileage. NJFCU has many auto loan options for you to explore including used car loans.
When Is It Best to Pay Cash?
In addition to what you need from a car, paying cash depends on your financial situation and habits. You’ll do well to pay upfront if:
- Your credit history prevents you from receiving a low interest rate on a loan
- Making regular monthly payments on a loan will be a challenge
- You can afford it without it putting your other financial responsibilities in peril
- You want more negotiating power during a private sale
Option 2: Auto Loan Financing
The average car loan interest rate in March 2023 was 6.46%, reflecting a sharp rise starting mid-2022 after a decade averaging around 4.5%.[2] And by the end of 2022, monthly car payments averaged $700 for new and $525 for used cars.
Costs are high, but by shopping around for the right lender as well as the right car, you can make a wise investment in your vehicle.
Try to Avoid Dealer Financing
You don’t have to finance a car through the dealership that sells it to you. There are five primary lender types for auto loans:
- Credit unions auto loans account for 28.4%[3]
- Banks are a close second at 27.3%
- Dealerships (or “captive lenders”) account for 21.9% of auto loans
- Finance companies provide 11.8% of car loans
- “Buy-here, pay-here” businesses capture 10.6% of car financing
Dealerships tend to be the most expensive route to financing aside from the “buy-here, pay-here” businesses that often have predatory lending practices, while credit union auto loan rates are consistently the lowest cost option. Shop around for the best terms you qualify for among different lenders.
When Is It Best to Finance?
In addition to choosing the best lender, your credit score is the biggest factor in determining how much you’ll pay in interest for your auto loan. The averages range from 4.75% for a new car borrower in the “superprime” range of a 781–850 credit score, to 20.62% on a used car for a borrower with a credit score under 500.[4]
Financing or even refinancing may also be wise if:
- Paying cash would deplete your emergency funds
- The auto loan rate costs more than the interest you’d earn on that cash during the loan term
- You prefer predictable monthly payments to the risk of unpredictable repair needs
NJFCU: A Better Deal on Car Financing
If you’re a New Jersey resident, be sure to include a credit union auto loan from North Jersey Federal Credit Union (NJFCU) when you compare your options.
Our financing program for new, used, and classic cars, motorcycles, recreational vehicles, and boats includes annual percentage rates significantly lower than car dealerships and most other lenders and loans for up to 100% of the cost including title and taxes. Members with auto-pay, direct deposit, and a NJFCU MasterCard qualify for an APR discount for an even lower rate.
We also offer help finding the right car, motorcycle, or boat with our research and price search tools, a guaranteed asset protection (GAP) program to protect you if your car is totaled or stolen without recovery, and a free myEZ Car Care Membership for discounts on repairs, travel, and more. Plus, you can save 30–50% over dealer prices on a mechanical breakdown protection (MBP) plan with us.
Take advantage of low auto loan rates credit union members depend on to stay on their budget from the best credit union in NJ: North Jersey Federal Credit Union.