Should We Take a Loan or Use Savings to Buy a Car?

A car is somehow a big purchase for a middle-class person, and the question of how to pay for a large purchase is always tied to the endless series of choices, such as save or borrow? Now or later? The list keeps going. A lot of people do believe they need to save up before they can dive into making that big purchase, but experts say otherwise. When you save up to buy a big screen tv or even a microwave, it makes a lot of sense, but would it be the same for a car?

Car loans have also become an easy and most preferred alternative to using all your savings at once. Of course, you’ll have to pay some amount of interest but all in all, it’s quite an easy route too.

Let’s go through the pros and cons of both lanes to get you to which path would be the wiser one to take.

Savings or Taking a Car Loan?

Getting your finances in the line is quite a hard job to take over. It does take up an immense amount of work. When you are thinking of buying a car, the most viable option today is a car loan. Car loans have become part of every major bank in the country. Moreover, you can also use a car loan calculator available online and calculate your EMIs and total expenses. Because this is the case – is this the one everyone should be opting for? This aspect varies from person to person, of course, while some prefer to use their savings and some prefer to borrow.

You might be thinking spending your savings is a better option than borrowing money, and you will also be rid of stress and the burden of a monthly EMI. Or you might think finishing all your savings at once is not good for you. So, here are some advantages and disadvantages to point out the things you could miss.

Pros of Using Savings

• It eliminates interest rates: When you use your saved up money to buy a car, you end up eliminating the burden of paying interest on that cash. You will be making the entire payment in one go, and you get the car for no extra charges at all.
• It is usually a stress-free option: Spending from your own wallet may be a bitter pill to chew, but it helps you avoid the long-term anxiety and worry that comes with repaying debt over time. People who aren’t excellent at managing their finances might quickly slip into debt traps if they aren’t careful with their borrowing, so spend just what you can afford right now.
• You do not need to maintain that credit score: Whatever your credit history is, if you use your savings to pay a payment or make a purchase, your credit score becomes meaningless and has no impact on your ability to spend. It is not the case with loans, as most banks demand customers to maintain excellent credit ratings in order to borrow.

Cons of Using Savings

• You have limited affordability: One of the major disadvantages of saving is that a person can only spend what they have saved. In such a circumstance, a person’s demands will have to be constrained, and they will be limited by the amount of money they have saved. In this case, if you like a more expensive car, you would not be able to buy it, or if the price goes up, you would not be able to afford it.
• It can hamper your future plan: If you’ve been saving for years with the objective of buying a car, it may become tough to spend your resources without jeopardizing your long-term ambitions. In these circumstances, a loan may be more appropriate. Although it may cost you extra, you will still be able to carry out your goals.
• It is a long process: Few people retain all of their money in a bank account and instead prefer to invest them in other forms such as stocks, bonds, mutual funds, real estate, and gold. While they are secure investments, accessing their cash when needed generally takes a few days.
• You could be discouraged for future savings: People who are compelled to spend all of their funds in one go may be discouraged from starting over. People may tend to discount the importance of conserving money and embrace irresponsible spending habits. It might make it harder to recover from the setback.

Pros and Cons of Leveraging a Car Loan

Pros of a Loan

• You get financially disciplined: Taking on debt necessitates discipline in controlling financial costs, particularly investment and spending during the first days until a person earns enough to return it. Thus, one advantage of debt is that it aids in the optimization of every single penny and assists the borrower in leading a financially disciplined life.
• It is mostly not very expensive in the long run: A loan is obviously more expensive than utilizing your savings right now, but in the long run, your investments are more likely to yield larger returns than the amount you end up paying as interest on the loan.
• Your tax burden is reduced: A hidden benefit of going into debt is that it helps reduce the tax burden. This is because of the fact that the cost of interest from taking out a loan decreases taxable income, and so limits the tax amount. Thus, while taking out a loan, a person can save a significant amount of tax and balance the expense of interest by taking advantage of the various deductions in the Income Tax Act of India relating to loans.

Cons of a Loan

• It brings along the factor of EMI: Loans have EMIs that must be paid over a period of months, if not years. In reality, this implies that the impact of a single large purchase is felt for as long as the debt is not fully returned. It is clearly not an ideal scenario, since a portion of your salary is being diverted to pay EMIs.
• Penalties and higher charges are by-products: Most banks and financial institutions charge their clients fees such as processing fees, prepayment penalties, and late fees. These can raise the overall cost of the loan and make it too expensive for some clients.
• Interest rates could be higher: Most banks and financial institutions adjust their interest rates on a regular basis in accordance with RBI policy in order to stimulate or discourage lending in the economy. Customers with previous loans will also have variable EMIs, and the interest rate will fluctuate over time. As a result, you may wind up paying a bit more in interest than you anticipated over time.
• There are high barriers: Most banks and financial organizations demand clients to provide collateral or securities in exchange for a loan. They also need their borrowers to have a good CIBIL score. In their absence, obtaining a loan might be quite difficult. Hence, there are numerous barriers to obtaining a loan.

Final Takeaway

When it comes to choosing between taking a car loan or using your savings, it comes to your finance management. If you are good with them and you know when to max it out or pay it off, you have it under control. You should also be willing to pay 20% to 30% more than the price of the car if you are compliant to take up a loan. If you are willing to wait for a longer time and spend your savings in one shot, you can buy it with your savings. Both of the approaches have their sets of pros and cons.