Why is cash better when buying a car?
Should You Consider Paying Cash For A Car?
When the time comes to buy a new car, you may be wondering whether paying cash is the best option.
Buying a vehicle with cash can certainly mean less of a hassle (and a lot less paperwork)! Plus, you’ll save all that money on interest right? But even if you have the cash in hand, it is still worth considering vehicle financing.
Before you make a decision, let’s discuss the positives and negatives of purchasing you next car with cash.
The pros and cons of buying a car with cash
When it comes to buying a car, there are several advantages to paying with cash and avoiding financing.
Here are the pros:
You will save on interest.
The biggest upside of buying a car with cash is the money you will save on interest payments. If you are purchasing a $20,000 car with $4,000 down and an available APR of 5% over 48 months, you will ultimately save close to $1,700 in interest. This is a great reason to consider buying a car with cash if you are able.
You will avoid overspending.
If you know that you only have $20,000 to spend on a car, you will not be tempted to overspend on trim levels or other add-on features. These added features can add up quickly and, before you even realize, you’re over budget .
Let’s use the above example again. You are planning to finance $16,000 of your $20,000 car, but the dealership offers you some upgrades. A better sound system, all weather mats, and blindspot protection are going to up your bill by $3,000. Now you are on the hook for financing $19,000 instead of $16,000. Instead of paying an extra $1700 in interest, you are paying an extra $2000 in interest, plus the extra $3000 in add-ons that weren’t in your budget. It’s easy to see how your budget can get away from you when increasing your financing is simple to do.
You will own the car outright.
Owning your car outright is another major reason to consider paying cash. You will have an asset that you can sell or use as collateral if need be. You also have the option to reduce your insurance coverage, as you will not be bound to a certain protection level. This can save you even more money.
You will never be upside down on your loan.
A major risk of auto financing is becoming upside down in your loan, which is when your Loan-to-Value is over 100% – that is, you owe more on your car than the car is worth. Since cars depreciate in value incredibly fast (new cars typically depreciate 25% in their first year), becoming upside down in a car loan is not uncommon. If you’re able to pay cash, you won’t have to worry about this happening.
You won’t have to worry about a monthly payment.
If you already feel like you have too many monthly bills to keep track of, buying a car outright will ensure you don’t add another bill to the pile. Sometimes having one less thing to worry about can make all the difference!
However, despite these advantages, there are, of course, times when paying for a car in cash will not be the best option for you.
Here are the cons of buying a car in cash:
You might deplete your savings.
If paying cash for your car will completely destroy your savings, it’s probably not a good idea. Financial experts always recommend keeping an emergency fund to account for unexpected expenses. If something unexpected comes up and you are forced to take out a short term loan or max out your credit card, that can be very harmful to your financial wellbeing. Only pay cash if you are in a good position to do so and it will not wipe out your savings.
You won’t build credit.
A great way to build your credit is to take out a loan and make consistent on time payments. If you pay cash, you won’t get any benefit from the purchase on your credit report. Even if you have the cash in hand, it might be better to take out a loan and comfortably make your payments to increase your credit score. This can be beneficial for any long term goals you might have, like buying a house.
You may limit your options.
While sticking to a strict budget is good because you won’t be able to overspend, the flip side to that benefit is that it limits your options. If you’re going to buy a new car, don’t you want it to be exactly what you want? If you finance your vehicle, you may be able to expand your budget to cover the exact make, model and trim level of the car that you want. Plus, you can get any add-ons that you might find particularly useful.
You might save more with special financing and rebates.
Sometimes dealerships will offer special low financing and cash back or rebate offers when you finance through them. In certain instances, the amount you save by not paying interest may be outweighed by the money you will make by taking advantage of the rebate, or at least even things out. This will typically only happen if you have excellent credit. In this case, do the math and see which option will save you more money.
You might miss out on investment opportunities.
If interest rates are very low , it sometimes makes sense to take advantage of them. This frees up the cash you do have for other investments or improvements on your house. If you were to take out a personal loan later on to pay for something, it would most likely be at a higher rate. Taking advantage of low APRs is often a good long term plan if you consider your finances altogether in one portfolio.
If increasing your credit score is high on your priority list, then financing your vehicle is probably a good idea for you. And if you already own a car and are looking to bump your credit score? Consider refinancing with Auto Approve. Refinancing can help you save money while also improving your credit over time.
And those are the pros and cons of paying cash for your new car.
As you can see, the right way to purchase a vehicle will vary greatly from person to person and situation to situation. As always, it’s important to do the math and see what makes sense, as well as take stock of what your priorities are.
Because of the advantages to financing, we tend to think that the best thing to do, if you have the financial flexibility to pay in all cash, is to put down a sizable downpayment to ensure you get a great low rate while also keeping a good chunk of your cash for other investments and emergencies.
And, if the dealer offers you a rate you’re unhappy with, you can always refinance your loan with Auto Approve to pay even less in interest, over time, or both.
We work tirelessly to find our customers the best rates out there and secure the best terms for them. Refinancing to a lower APR can save you thousands of dollars, and it takes only a few minutes to get started.
Buying A Car With Cash: The Pros, Cons, & When To Tell Your Dealer
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You’ve worked hard and saved up for the longest time, and now you’re ready to buy a new or used vehicle. Then, you find the perfect one that fits your needs and budget. Now, you’re probably asking: should I pay cash or take out a car loan?
We’ve all heard before that “cash is king” when buying a new vehicle. It’s evident that many consumers see the benefits of holding on to their cash and go with financing instead. Although buying a car with cash sounds ideal, according to Experian data, 85% of all new car purchases and 36.8% of used vehicles were financed through a loan or lease.
So should you buy a car with cash? Buying a car with cash has its pros and cons, which we’ll highlight in today’s post. We break down everything you need to know to help you make the right decisions.
The Pros and Cons of Buying a Car With Cash
One of the most compelling reasons to purchase a new set of wheels with cash is to avoid monthly payments and high APRs. With that said, there are other benefits of buying a vehicle outright rather than financing. On the other hand, there are risks and drawbacks to cash vehicle purchases.
Pros of Buying a Car With Cash
You won’t pay interest
One of the top reasons why people go for cash purchases is to avoid paying interest on a car loan. Carandriver says the average interest rate on a car loan is 4.07% for new vehicles and 8.62% for used cars. Depending on your credit score, these percentages can be lower or higher. For example, if you buy a car for $30,000 with a $5,000 down payment, you’ll need to take out a $25,000 loan. If the auto loan comes with a 4.5% interest rate and a 60-month payment term, you’re looking at a total loan interest of $2,964.
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You protect yourself from overspending
When you buy a car with cash, you’ll use the money on hand to cover its price tag, forcing you to stick to your budget. With an auto loan, you tend to focus more on the monthly payment than the car’s overall price. Thus, there’s the possibility that you’ll spend more than you’ve planned. Since you have the mindset that your monthly payments are way less than putting down all your cash on a vehicle, you might get carried away with upgrades and accessories or even opt for a different and more expensive car altogether.
You’ll end up spending less
Aside from not having to pay interest from monthly payments, having cash on hand gives you leverage when it comes to price negotiations. Although paying for a vehicle outright doesn’t guarantee you’ll receive considerable discounts, it’s still easier to negotiate since you know what you can afford. The dealership knows that you’re a serious buyer. In many cases, the salesman will be happy to budge from the asking price for a guaranteed sale.
Protip: It might be better to hold off from telling the dealership that you’re paying cash, which we’ll discuss more below.
You already know what you can afford
Taking out an auto loan makes car shopping more overwhelming because it opens up possibilities. You might fall into the trap of adding more wiggle room to your budget limit and opt for a more expensive model or trim level – all because you think that you don’t have to put down a lot of money right away. With cash in hand, you’ll have to stick to what you can afford, which makes finding a car a lot easier.
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Cons of Buying a Car With Cash
You may deplete your cash reserves
Buying a car with cash is hard because it pulls money from your life savings for an asset that will go down in value. Of course, depending on how much money you have in your savings account, paying cash for a new vehicle could drain your savings, leaving you vulnerable in emergencies. Unless you have a lot of cushion in your savings, it may make more sense to use your cash for a larger down payment and reduce the interest you’ll have to pay.
You’re not building your credit
If you care about building your credit, paying cash for a new set of wheels won’t help you much. Since you’re not building your credit now, you may find it more challenging to secure a loan in the future, or at least one with favorable terms. Financing a car purchase lets you build your credit by making regular loan payments.
You may miss out on special financing terms or offers
Buyers with outstanding credit scores may miss out on special financing terms, lower interest rates, rebates, and other special offers. Dealerships often sweeten the pot to compel potential buyers to sign up for financing. These perks are generally left out if you tell the salesman you’re paying cash. A good rule of thumb is to compare the savings from these offers on auto loans versus the savings from paying cash.
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Should You Tell the Dealer You’re Paying Cash?
No. Having enough cash to buy a new or used car is fantastic. But this is where we discourage you from oversharing. Blurting out “I can pay cash” to a car salesperson is a good way to kill the good deals and special offers coming your way.
With such a saturated and competitive industry, dealerships’ margins on car purchases become slimmer by the day. In reality, dealerships profit more from financing deals on new or used cars. The allure of guaranteed sales from cash purchases isn’t enough anymore. By telling your car salesman you have cash and won’t finance, they may charge you more to make up for the difference.
If the salesperson asks you if you’re paying cash or financing, let them know that you’re undecided or wish to hear about their financing deals.
So when should you tell the dealer?
First, use your negotiation skills and exhaust all avenues to secure the best deals possible. Once the final price is negotiated, you let them know you’re paying cash.
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How to Buy a Car With Cash
Deciding on whether you should buy a car with cash? Find out the advantages and disadvantages, how you can purchase a car with cash, and whether it’s the right option for you.
How to Buy a Car With Cash
Carpages Staff
Car purchases can be intimidating, as they represent one of the larger expenses a person commits to. However, if you’re able, buying a car with cash upfront can help neutralize some of the unknowns that can sometimes make the process a bit scary.
If you’re thinking about buying a used car or even a new car with cash, there are some factors you should consider beforehand to help the process run smoothly. Here’s everything you need to know about how to buy a car with cash.
Why Buy a Car With Cash?
If you’re unsure whether or not buying a car with cash is a smart or feasible choice for you, it’s a good idea to weigh the pros and cons at the early stages of your car researching process.
Advantages of Paying Cash for a Car
Believe it or not, when you buy a car with cash, you end up paying less in the long run than you would through traditional monthly payment methods. When you don’t have to worry about paying interest on an auto loan, that saved money adds up quickly.
Also, approaching the car-buying process with a fixed and rigid budget is easy when you plan to pay cash. It’s far easier to stick to your budget and not overspend when you take the option of a loan off the table right from the start.
Another important factor to consider is car depreciation. Because cars depreciate quickly, traditional loan methods often leave buyers stuck paying more for their car than it’s worth in the long run as payments stretch out over the years.
When you pay cash up front, you pay for the car’s value before depreciation starts to factor in, helping you make sure you truly get your money’s worth out of your car purchase.
Disadvantages of Paying Cash for a Car
Despite all the benefits of paying cash for a car, there are times when it won’t make financial sense for everyone.
For example, if you have to use most of your savings to make the upfront payment, it’s probably wiser to either wait and save up or pursue an intelligent, well-researched loan option. For this reason, it’s a good idea to prepare for a cash purchase ahead of time instead of making a split-second decision.
Another situation in which a monthly payment might be better than paying cash is when a buyer with good credit can secure a low-interest rate.
Although they will still end up paying the extra amount in interest, they can take that principal sum, and with a good investment opportunity, the buyer could make more in returns than they might pay in interest on the auto loan.
Similarly, it’s wise to check your options before committing to buying a car with cash. Auto traders often run financing deals or special offers that may be more financially sound than an upfront cash payment for some people.
It’s crucial to gauge all your options and take your time comparing them all to decide which approach will save you the most money in the long run.
Can I Buy a Car Fully With Cash?
The short answer is yes! With one upfront payment, you can purchase a car within your desired budget.
Be advised, though, that the best way to pay cash upfront for a car is not through cash money but with a cheque for the total amount. If you seek to purchase a new or used car from a trader or dealership, many businesses prefer their customers to finance.
These businesses will be less willing to accept cash but will often allow payments by cheque since it is easier to handle and process and more secure.
How to Buy a Car With Cash
Now that you’re aware of all the factors you should consider when deciding whether or not to pay for your car upfront with cash, here’s how to make the process of finding and paying for a car with cash as smooth as possible.
- Research the Car You’d Like to Purchase
This step should be a given regardless of your purchase method. If you’re purchasing a used vehicle, it’s even more important to look at a used car buying guide to help you understand the car types, their pros and cons, and how to choose the right car.
Differentiating between wants and needs while researching cars can help you stick to your budget. Consider the cost of fuel, the age and mileage of the vehicle, and hence its longevity, and consider what you’ll use it for.
If you’re choosing between pursuing a new or used car, keep in mind that used cars ultimately save you the most money in the long run. Because new cars depreciate up to 30% of their original value within the first year of ownership, used cars represent a far better value and bang for your buck.
With your needs in mind, you’ll be able to estimate a more realistic budget. Determining a realistic and firm budget is an important step in buying a car for cash because your budget will be a critical factor in where you shop and what kind of cars you look at.
When setting a budget, it’s important to be honest with yourself. Don’t overestimate your budget since this will lead you to look for more expensive cars than you can realistically afford.
If you want to purchase a car out of your current budget, go back to the drawing board and make sure that you’re shopping based on your needs. If so, then take a little longer to save to ensure that you can comfortably afford the kind of car you truly need.
When you buy a car with cash, the final cost you’ll pay will be more than just the sticker price. Factoring all of these extra costs and fees into your budget ahead of time will help save some shock and frustration.
Along with the cost of the car, you’ll want to calculate the cost of sales tax (a figure that will vary based on your province or territory), licensing and registration fees, and documentation or paperwork-handling fee for the dealer or trader.
Don’t forget to factor in car insurance costs, which is a monthly fee but will contribute to your car’s overall purchase price.
- Determine Your Current Car’s Trade-In Value
One way to help mitigate some of the costs is to trade in your current car. Using estimation guides, you can come up with an estimate of your car’s trade-in value. In some cases, if you’re purchasing a car from a dealership, you can trade-in your current vehicle at the same location for a price reduction.
However, if you’re purchasing in a private sale by the owner, your trade-in will have to take place beforehand or afterward, and the associated funds can help offset the cost of your purchase.
Once you’ve determined the overall cost of the car you’d like to purchase and reconciled it with your budget, it’s time to start setting money aside so that you can make the purchase upfront with cash.
This can take some patience and determination, but many will agree that saving up before a purchase is better than making monthly payments plus interest after the fact. In addition, a sense of pride and achievement often accompanies such upfront purchases.
- Purchase the car at a reliable place
Now that you’ve saved enough money, it’s time to contact the classified pages and dealerships to take a look at the car you’re looking to purchase. Make sure you look for a seller that is reputable and reliable. Once you’ve secured a place to buy your car, make sure that the seller will take cash as payment. Sometimes, sellers will only accept cash up to a certain price.
Once you’re ready to make the purchase, even if you’ve saved enough for the asking price, it’s always wise to try to negotiate the sticker price.
Many dealerships, traders, and private owners are open to haggling respectfully and can make reasonable accommodations. If you are purchasing from a dealer, don’t mention your intentions to pay cash outright.
Dealerships and auto traders usually offer their best savings to customers who finance because salespeople and the business will make commissions off the financing. However, you’ll get a better offer if you keep your purchasing method to yourself until the end of the process.
Once you’re ready to pay, make sure that you have your checkbook available and ready. Consider using a cashier’s cheque, which you can secure ahead of time at your local bank. This offers a very secure payment method with a foolproof record of payment.
Other options, such as certified personal cheques and wire transfers, are also methods you can use to buy a car with cash. However, each one takes a different amount of time to go through and can be associated with small fees.
Final Thoughts
If you’re considering purchasing your next car with cash, be prepared to consider all these important factors that will help you make a financially sound decision you’ll be happy with for years to come.
Remember that while most car dealers will accept upfront payments, many will not accept cash money payments above specific amounts. This is because they are also more motivated to offer deals to customers who finance.
However, purchasing a car with cash can be an excellent option for someone willing to save up, stick to a budget, and avoid losing money to depreciation and interest. Make sure to research and weigh your options to make sure that buying a car with cash is the best method for you.
