Paying Cash for a Car - What to Know
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Paying Cash for a Car - What to Know

By Zac Estrada | February 10, 2021

Most people like to avoid having a car payment, especially one that could take four or more years to pay off. If there is money readily on hand, paying cash for a car is typically a better route than financing or leasing. Over time, people who pay cash for a vehicle spend far less money than through payments because they're able to avoid various lender charges every month. And compared to leasing, the buyer owns the car outright, rather than giving it back to the car company at the end of the term. For buyers in a specific financial situation, such as those without good credit or a bank account, paying cash might be the only way to go.

Owning a car is an expensive undertaking on its own. According to a 2014 survey by AAA, the average cost of car ownership is nearly $9,000 a year based on driving about 15,000 miles. That includes everything required to keep a car going, such as insurance, registration, maintenance, and fuel costs. But owing money on a vehicle makes it even more expensive. Paying cash for it in the first place is a way to minimize your debt if your financial situation allows it.

Five Reasons to Pay Cash For a Car

You'll Spend Less

It will feel tough to empty your savings account to buy something as expensive as a new car while knowing that depreciation will be a factor from day one. Financing can feel better initially, even though many people end up owing more on the loan than the car is worth. After all, the only cash you're likely laying on the table is the down payment and maybe your trade-in. As long as the car payment is affordable, most people don't think twice about the car's price at the end of the car loan. But interest adds up, and over time, financing is a costlier proposition.

Prioritize What You Need in a Car

Automakers make money on optional features, equipment packages, and fancy trim levels. Meanwhile, dealers make money by adding accessories and maintenance plans, keeping you tied to their service department. A salesperson may sell you on a car that's on the lot with more options than you intended to go for or comes with floor mats and larger wheels that were installed by the dealer. Those add-ons may only come out to a few more dollars per month for 60 months, but it could come out to thousands of dollars more on the total sticker price. That should raise flags for any cash buyer. It's also a factor when considering whether you need an all-wheel-drive SUV when a cheaper and more fuel-efficient front-wheel-drive sedan or hatchback may fit your needs.

Paying Cash Leads to Other Discounts

There are a few ways that buying the car outright can lead to further savings. For example, private sellers often sell their vehicles well below what dealers ask for them. In another instance, not having to finance might make dealers willing to go lower on a used car to get rid of it. Financing is almost always tougher on a used car anyway. You also give yourself more options when you can pay cash as you can easily choose between private sellers and dealers. You may lose out on rebates from the car dealer or manufacturer for those who finance through their approved lender or credit union.

Avoid Paying Interest

The most obvious way that paying cash for a car makes financial sense is not paying interest. For example, if you finance a used car that costs around $12,000 at an interest rate of just below 6%, you will end up paying about $15,000 at the end of the car loan of 60 months. The longer the car loan length, the higher the interest rate, and the more expensive the car, the more you end up paying in the end. Even with an interest rate below 1%, that added amount for every dollar financed adds up.

Improves Your Credit Rating

Paying cash is also an excellent way to improve your financial discipline. Most credit agencies factor in that most people have loans. Not having a car payment shows you have less debt and are less likely to be a credit risk when applying for a credit card, mortgage, or student loan.

What to Know About Paying Cash at a Car Dealer

One of the essential things to understand is that many dealers won't give you a better deal for paying cash because they make money by signing up a buyer with a loan. For example, they get you approved for a loan and tell you that it's 4.5% for 60 months. In reality, the interest rate is 3.5%, but the dealer gets to keep the difference. It's an entirely legal practice, and most car dealers do it. Plus, they usually run a credit check on the buyer during the process anyway.

How to Pay Cash at a Car Dealer if You Have Your Own Money

If you're paying cash for a car with money from your savings account or another source, be prepared to bring a cashier's check. Most car dealers don't want to risk taking personal checks, and you probably don't want to carry around a suitcase full of cash. A good practice is to talk with the manager and let them know that you are paying cash and find out what payment method would best. Depending on the price, some dealers may accept a credit card. It's advantageous for you if that card either has zero interest or is tied to some rewards program such as airline miles. Still, it's usually a losing deal for the dealership because of fees attached to the card. It's also on you to remember to pay it in full before you're stuck with outrageous interest charges.

How To Pay Cash at a Car Dealer if You Have Your Own Money

If you're paying cash for a car with money from your savings account or another source, be prepared to bring a cashier's check. Most car dealers don't want to risk taking personal checks, and you probably don't want to carry around a suitcase full of cash. A good practice is to talk with the manager and let them know that you are paying with cash and find out what payment method would best.

Should You Tell the Dealer That You're a Cash Buyer?

Though some car dealers might act cold towards cash buyers, smart dealers know that it generally means a fast sale and good reviews if they treat the customer well. It also means that there's no risk of the deal falling apart in the finance department due to the buyer's credit scores. That means the only thing you're ultimately negotiating is the final price of the car. Some advisors recommend not disclosing that you're paying cash; instead, you can say you have your own financing and are open to other options. That includes choosing a lender not promoted by the dealer, such as your bank or credit union. Then add that you want to negotiate the best price based on cash.

When Should You Take the Car Loan?

There are a few instances where you might want to take the car loan, even if it's just to start. One example is if the car dealer offers you a substantial discount on the vehicle. For instance, if the car costs $14,000, but they will give you $3,000 off to take their loan, then it might be a good idea. If you have the cash for the resulting balance, you can pay it off after making a few monthly payments. Just make sure that there is no pre-payment penalty wrapped up in the terms.

Pros of Paying Cash

Another advantage of paying cash for a car is not having a monthly payment. You'll own the vehicle free and clear and are open to buying your own auto insurance and not the pricier plans a finance company will require you to choose. The third advantage is that you'll most likely be paying only what the car is worth and not an inflated value due to total interest over the life of the loan.

Cons of Paying Cash

The biggest downside of paying cash is that it will likely limit what you're able to buy. You may have to buy an old car instead of a new car and opt for fewer options or luxury features. Another con is that taking out money for a vehicle may deplete your emergency fund or take money away from your investments. In general, you shouldn't completely drain your savings account to pay cash for a car.

Saving to Pay Cash for a Car

If you've decided that you want to pay cash for your next car, then there are a few strategies you can employ to save that money. First, find out what kind of car you want to buy and find out what it costs. You can then set up a savings regimen for yourself, depositing an amount every month into a separate savings account to accumulate enough money to pay cash for a car.

Negotiating With Cash

Car dealers generally want you to accept their loans as it yields extra money for them. However, most car buying advisors will tell you always to negotiate the vehicle's firm final price and not the monthly payment. In most cases, it's probably better not to tell them explicitly that you're paying cash. Instead, focus on getting the final price you want and then telling them you're paying cash after the negotiation is complete.

Don't Forget Fees

When it comes to paying cash for a used car or new car, remember that there are fees on top of the final purchase price. Whether used or new, there will always be licensing fees and the sales tax on the vehicle. If you buy from a car dealer, there are many other fees they may include. Still, those are usually negotiable regarding the vehicle's final purchase price. Another important thing is to get an insurance quote on your car of choice before going into the sale.

Paying Cash in a Private Sale

As previously mentioned, one significant benefit of paying cash is that you have the option to look at private party sales with full freedom. Used car loans may have some restrictions on age and mileage that will reduce your choices regarding what you want to buy. For example, suppose you're looking at vehicles known to get very high mileage, such as a Toyota Camry or Corolla. In that case, you might be looking at cars with well over 100,000 miles. It might be challenging to secure an auto loan on this type of vehicle. Using cash ultimately gives you more options in a car purchase. You can find vehicles listed for private sale on Craigslist, Facebook Marketplace, Autotrader, and other websites.

How to Negotiate a Private Sale

Once you find a used car listed for sale privately, then it's time to go in and negotiate. Don't start negotiating until you can look at the car and test-drive it. Some sellers won't be interested in entertaining low offers. However, once you look at it and drive it, you might find problems that you can then use to lower the purchase price. Always take a thorough test-drive and either thoroughly inspect the car yourself or take it to a mechanic if you don't feel qualified. A seller with nothing to hide won't mind having the vehicle checked by a pro. Start negotiating with the lowest reasonable offer and then move up. Don't indicate what your maximum price is or what you're willing to pay. An all-important rule of negotiating: Always be prepared to walk away if the seller is uncooperative.

Private Party Sales Agreement

Once you agree on a purchase price for the vehicle, it's time to write up a sales agreement. Check with your state's department of motor vehicles on what exactly is required, but it's crucial to get a receipt. A sales contract should include the following:

  • Year
  • Make
  • Model
  • Date of sale
  • VIN
  • Current mileage
  • Sale price

An excellent way to make the vehicle for cash exchange is to do it at a DMV. That way, you're in a public place, and you can make sure that everything is in order. Typically you would pay in cash or with a cashier's check. With the latter option, you could also meet at a bank to make the exchange.

What To Look Out For

The first thing is always to make sure you leave with the title. Don't drive off in your new vehicle without it. The second thing is to be very wary of any car where the owner doesn't have all the paperwork. Even though there are legitimate reasons to be missing paperwork, there are too many risks. The owner could just have easily applied for a lost title or changed the name on the registration before selling the vehicle. It's also a good idea to see the seller's ID and make sure that they, as the owner, are authorized to sell the car.