How Should You Purchase Your First Car?
By: Staff

When getting your first car, you have three options -- pay cash upfront, finance it or lease it. All of these options have their share of pros and cons. Let’s examine each option for first-time car buyers.

Buying a Car With Cash
If you have been a savvy saver and have accumulated enough cash to pay for your first car outright, you deserve some congratulations -- that’s no small accomplishment, particularly in this economy. Paying for a car with cash offers several advantages. First, you don’t have to worry about paying a car note each month. Second, you own your car completely from day one. Third, you end up saving a tidy sum on finance charges. All of these are positives for someone who is just starting out in life.

However, there are some downsides to consider when paying cash for your first car. For one, an all-cash transaction does nothing for your credit history. It’s not unusual for those who are fresh out of college to have a few blemishes on their credit report or to have little established credit. If you don’t finance your car, you miss out on the opportunity to prove your creditworthiness by paying your bill on time. Additionally, that cash may be better used elsewhere. For example, if buying a car would deplete your savings, what would you do if you needed cash in an emergency? Could you use that money for a down payment or invest it? That money might be more valuable to you if you invest it in an asset that appreciates unlike a car.

Buying a Car with an Auto Loan
Financing a car purchase gives you the opportunity to build a solid credit history. This will serve you well when making your next large purchase—a home. Without a good credit score, you won’t qualify for the best interest rates on a mortgage. If you choose to finance, you will also probably be able to afford a more expensive vehicle.

When you get an auto loan, however, you will have to pay finance charges. On a $20,000 48-month auto loan at 6.592% (the current national average interest rate for a 48-month used auto loan, according to, you’ll end up paying a total of $2,806 in interest payments. Financing a car doesn’t alleviate all upfront costs. You still have to pay a down payment, sales tax and other fees. You’ll also have to factor a car payment into your monthly budget. Use’s Auto Loan Calculator to see how much you will have to pay.

Leasing a Car
Leasing a car often allows you to buy a more expensive car than you could afford by paying cash or getting an auto loan. Additionally, this option usually requires little upfront cash outlay because dealers often roll sales tax and other fees into the monthly payment. What you save in upfront costs can go towards paying off higher interest debt, building your emergency fund or be invested. You’ll also build your credit score by making payments on time.

The major downside with leasing a car is that you will not be building equity. That means you won’t have anything to show for your payments when your lease is up. With no trade in, you’ll have to start over when it’s time to buy another car.

To shop for deal on auto loans in your area use’s Auto Loan Rate Search.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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