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Should I finance a used car?

Should I finance a used car?

Loan vs cash - the pros & cons

Buying a used car is a big financial decision and figuring out how you’re going to pay for it can be stressful, particularly if you’re on a tight budget. If you do decide to buy a used car instead of a new one, you’ll be joining three million Aussies who do so annually. Of the 2.7 million Australians who currently have a car loan, 70% of them used that loan to purchase a used vehicle.

When it comes to choosing between getting a car loan or paying cash, it's important to evaluate all your options carefully before making a decision.

Pros of a car loan

If you’re wanting to buy a used car, but don’t have the cash on hand to buy it outright, a car loan could be a great option for you!

Here are some of the advantages of financing your used car with with a car loan:

Wider choice of vehicles

Getting a car loan allows you to shop from a wide range of car makes and models, whereas you may have only been able to afford a cheaper car without financing. Because your repayment costs are spread out over a longer period of time, you’ll be able to shop from a wider range of cars that previously would have been unaffordable.

If you’re wanting to buy a car that is typically more expensive to buy outright, like an electric or hybrid car, a car loan could be a great way to help you finance it. If you do buy an electric car, you’ll be joining a growing group of environmentally conscious Aussies - in 2021, electric vehicle registrations increased by 62.3% from the previous year.

You can check out CARS24’s great range of eco friendly vehicles here.

Ability to make lower initial payments

One of the biggest advantages of buying a car on finance is that you’re spreading out the cost of the car over a longer period of time, usually between 1 and 7 years. By doing this, you’ll be able to save a considerable amount of money in the short term and might want to use this saved money to pay off another debt or save for a down payment on a home loan.

Building your credit by making timely loan payments

Finally, getting car finance can help you improve your credit rating, making it easier to get finance in the future, whether that’s for a house or another vehicle. To improve your credit rating, you’ll need to make sure you consistently meet your loan repayment obligations on time and in full.

Cons of a car loan

The prospect of buying a car without needing to put any money down can be quite appealing. However, it’s important to understand all the drawbacks of financing a car to so that you can make the right decision for you.

Can be difficult to secure with a low credit score

If you have a low credit score it may be difficult for some lenders to approve your loan request. However, other lenders may be willing to look beyond your credit score, and consider other factors like your employment status and the type of loan you’re looking for. Generally, the higher your credit score, the lower interest rates you’ll be able to receive.

Finance fees involved

One of the main drawbacks of getting a car loan is that you’ll have to pay interest and fees to your lender in addition to paying back the loan amount. This means that you’ll end up paying more over the life of the loan than if you had purchased the car using cash.

In addition to paying interest, lenders will charge several fees to finance your car. These might include entry fees, monthly fees or early repayment fees. Make sure that you read the contract carefully before signing because these costs can quickly add up and negatively impact your monthly budget.

“When thinking about a used car loan, interest rate isn’t everything” says William Brown, Co-Founder of car loan marketplace Driva. “It’s critical that you take into account the fees that every lender charges, and sometimes you’re better off opting for a lender with a slightly higher rate if their fees are significantly lower”.

Using the CARS24 finance offering, you’re able to retrieve pre-approved offers in less than 5 minutes. When comparing these offers, you can rest assured that all fees and charges are included in the weekly repayment figure. That means you can compare with absolute confidence!

Pros of paying with cash

Consumers who can afford to pay cash for a new car enjoy certain advantages over those who choose to finance, including:

Save money in interest and fees

Leasing and financing both add additional costs that inflate the overall price of the car. By paying in cash, you avoid these expenses and get more bang for your buck. You’ll end up paying a lower amount over the duration of the loan than had you taken out a loan.

You set your own pace

Saving to buy a car with cash means that you can take your time and not feel pressured into making a purchase. You may even be able to postpone the purchase while saving additional money. This allows you to make a more educated decision about which model you wish to purchase, taking advantage of online resources such as the CARS24 Car Advice blog.

Cons of buying a vehicle with cash

Though there are some great incentives to buying a car with cash, it’s also important to consider the disadvantages of this finance option before you go ahead and make the purchase. These include:

Limited car choices

If you cannot afford to pay cash for a vehicle, your choices will be limited to what's available at that price point. If you need certain options or features on your new car, paying with cash may not allow you to obtain the model of your choice. This could leave you feeling frustrated and dissatisfied about your purchase decision.

Your cash is gone!

Your savings may take a considerable hit when buying a car outright, this buffer may come in handy for an emergency or rainy day. It's important to make sure you have enough of a savings buffer after buying your car to cover any unforeseen expenses that may arise.

Final thoughts

There are many factors to consider when determining whether or not it's a good idea to finance a used car, and your personal financial situation should play a large role in making this decision. Buying a car with cash has its perks if you can comfortably afford it.. Financing, on the other hand, can be beneficial if, giving you a savings cash buffer for any unforeseen expenses and helping expand the range of vehicles available.