Buying a car is a big commitment as it’s a significant financial decision. There are various ways to facilitate a large purchase, and if you’re like me, you’ll want to make sure you’re not just getting the car, but also maximizing your hard-earned money and obtaining the best possible financial outcome. Here are 3 main scenarios people typically consider when it comes to financing a car—because the right approach depends on your unique financial circumstances.
Read on to find out what these 3 options are, and which one ultimately wins when it comes to maximizing value and making the smartest financial decision for your big purchase!
Option 1: Paying Outright with Cash vs. Credit Card Purchase
Let’s start with the most straightforward option: paying outright with cash. While this may seem like the easiest choice, paying in cash means your money would no longer be working for you.
Paying Outright Cons:
- You lose the opportunity to earn anything back for that big lump sum.
- Your cash is no longer earning interest or cannot be invested as it’s essentially “gone.”
Credit Card Benefits:
- When paying with a credit card this usually incurs a fee however it opens the door to earn valuable points, which could be redeemed for travel, cashback, or other perks dependent on your financial institution.
- This payment method may also unlock the potential of a balance transfer to save on interest in the long run. Read on to find out how.
Option 2: Car Loan vs. Balance Transfer
Now, let’s consider financing the car with a loan. Here’s an example comparison between a traditional car loan and using a balance transfer:
Car Loan lets assume:
- Loan Amount: $70,000
- Interest Rate: 6%
- Monthly Fees: $5
- Duration: 36 months
- Total Cost: ~$77,560 (includes interest)
Balance Transfer, lets assume:
- Balance Transfer Amount: $70,000 and paid off by the conclusion of the promotional period
- Promotional Period Duration: 36 months at 0% interest
- Annual Fee: $300 (over 3 years)
- Total Cost: $70,300
Savings:
By opting for the balance transfer instead of a car loan, you could save around $7,260 over the course of 36 months, which is significant when compared to the interest charged by car loans in this example.
Scenario 3: Balance Transfer with Savings
This strategy allows you to make the most of your hard-earned money while reaping additional benefits. In simple terms, you invest your cash to earn interest, buy the car on a credit card to collect points, and then arrange a balance transfer to pay little to no interest—much lower than what you’d pay with a traditional car loan. Here’s how you can do it:
What to Consider When Researching Balance Transfers:
- Promotional Duration: The longer the promotional period, the better. Look for balance transfer offers that give you plenty of time (12-36 months) to pay off the balance without incurring interest.
- Balance Transfer Fees: Check for no or minimal balance transfer fees. Some credit cards charge a percentage of the transferred amount, so aim for those with low or no fees to keep your costs down.
- Ongoing Fees: Make sure to account for any annual fees or other ongoing charges. These fees should be low enough that they don’t eat into your savings.
- Interest Rate After the Promotional Period Ends: Once the promotional period expires, the interest rate can skyrocket. Make sure the ongoing interest rate is still reasonable if you happen to carry a balance past the promotional period.
Example Scenario:
Lets assume:
- Amount: $70,000
- Credit Card Fee: 3% ($2,100)
- Balance Transfer: 36 months 0% interest and balance paid off in full during this time
- Annual Fee: $100
- Total Cost: $72,400 (including fees)
- Interest Earned (on invested cash): 4% over 3 years lets say in a high yield saving account $8,400
- In this example with this strategy applied this means your invested money in a high saving yield account minus all fees = $6,000 of
This strategy will allow you to earn interest on your money for three years while paying off the car with no interest, maximizing your hard-earned cash and earn points at the same time.
Tips for Success:
- Discipline is Key: This strategy only works if you are disciplined enough to pay off the balance during the promo period.
- Calculate Fees: Be sure to factor in balance transfer fees, annual fees, and credit card transaction fees before deciding which route is best for you.
- Maintain a Strong Credit Score: To qualify for the best 0% balance transfer deals, make sure your credit score is in good shape.
Why This Strategy Works
At the end of the day, this strategy works because it allows you to maximize the use of your money —earning interest, collecting credit card points, and saving on interest compared to a traditional car loan.
If you’re considering buying a car, I hope these scenarios help you understand your options and how to make your financial decisions work harder for you. It’s not just about getting the car you want—it’s about getting the best deal possible and making the most out of your money.
Check back into the Finance Hub on a regular basis to learn more financial hacks to save or earn more money!
Disclaimer: The information provided in this blog is for informational purposes only and should not be considered financial advice. Always consult with a qualified financial advisor or professional before making financial decisions. The strategies and examples shared here are based on personal experiences and may not be suitable for everyone. Individual circumstances vary, and it’s essential to conduct thorough research and consider your financial situation before proceeding.
