When buying a car, paying cash is always the best option. A car is a means of transportation, and you can buy a working car for around $1,000. Then rather than making payments, start saving those payments until you can afford a better car. Saving for a car you are going to buy is better than paying for a car you've already bought.
For those who can't accept that advice, you should know who is making money off your loan.
From the dealer's perspective, getting a bank loan is equivalent to paying cash. In either case, they get their money upfront. Sometimes the dealership will give you different terms if you are paying cash than they will if you are securing a loan with them.
Some car dealerships get paid for making loans in addition to selling cars. They can borrow money at wholesale interest rates and mark it up slightly before passing the rate on to you. They also have a vested interest in making sure you can borrow enough money to buy their car.
Here are the concerns you need to address to determine which option is better:
1. Can you negotiate a lower price if you pay cash?
2. Are there any manufacturer's rebates that are lost if you get a loan with the dealership?
3. Is the interest rate and length of the loan better than the going rates at a bank or credit union?
4. Can you qualify for the dealer's best rate?
One approach is to call several banks or credit unions and collect the terms of their car loans, then prequalify for a car loan at the best offer. When you go shopping for cars, negotiate the best terms possible if you are paying cash. These would be the terms to compute the payments for a bank loan.
After settling these, ask them for the terms if you are getting a loan from the dealer. You may find the price of the vehicle changes dramatically. Even with zero-percent financing of a larger amount, the payments could be higher or lower than the bank loan. Having the terms of a bank loan in your pocket allows you to compare payments more easily.
And if you have been preapproved for a car loan, you also have the option of buying a used car from a private owner.