The Advantages of Financing a Vehicle

If you are in the market for a vehicle, and you have the funds available to purchase the vehicle outright, you may wonder if you should purchase the vehicle with cash or opt for financing. Financing a vehicle requires careful research -- you'll need to find out how much you'll pay in interest, loan fees and other financing costs. However, opting for financing can offer several advantages.

Maintaining Savings

Choosing to finance a vehicle instead of purchasing it outright can help preserve your savings. This allows you to retain funds for other expenses, such as vacations, home improvement or eduction. It also lets you keep a financial cushion for unexpected expenses -- if the car breaks down or you are involved in an accident, maintaining your savings provides you with the money you need to pay for repairs or meet your insurance deductible.

Building Credit

When you finance a vehicle, your lender reports your payments to TransUnion, Equifax and Experian, which are the major reporting bureaus in the United States. If you make your payments on time, financing can help you build a solid credit history, which will raise your FICO score. This can help you obtain other types of credit, such as installment loans, credit cards and mortgage loans.

Higher Quality Vehicle

Paying for a car with cash can limit your selection to vehicles with purchase prices below your savings balance. This may mean that you have to settle for a used vehicle or a lower-quality model. Conversely, financing increases your purchase power, allowing you to purchase a newer or higher-quality car. Although any car requires maintenance and repairs, a high-quality new vehicle may require fewer repairs. If you buy a new car, the dealership might pay for scheduled maintenance for the first one or two years after your purchase.

Considerations

Although financing a car can offer advantages, it may also pose disadvantages. Financing can tempt you to buy a more expensive car than you can afford -- if you have trouble making your payments, you may incur late fees and risk repossession or damage to your credit rating. Also, financing involves paying interest on the money you borrow to pay for the vehicle purchase, so you will end up paying substantially more than the purchase price of the car over the life of the loan.