• Buying Guides

Paying Cash for a Car - What to Know

By Michael O'Connor | February 19, 2022

When the time comes to buy a new car, you have a lot of options available to you. With so many choices of models, add-ons, and dealers, car buying is a complicated process no matter what. However, how you are going to pay for that vehicle is by far the most important decision you will have to make and will affect whether or not it ends up being the right choice for your situation.

When most people buy a vehicle, they do it with a car loan and make monthly payments after putting down a down payment at the dealership. You can also pay cash for the car, which means you buy it outright and pay the full price upfront. This option may or may not be the right one for you depending on your circumstances and understanding the benefits and disadvantages of paying cash for a car can help you decide.

Difference Between Buying a Car With Cash and Financing

Since the purchase price of a vehicle is so high, most car buyers will choose to get financing for the price of the car. When you do this, you will make a down payment and then get a loan, either with a bank or credit union, for the remainder of the price. By doing this, you can get a car that you might not have the money for right away and instead make monthly payments to the lender with interest.

A cash buyer will simply pay the cost of the car upfront and doesn’t have to deal with getting financing or paying interest. Depending on your financial situation, this may or may not be possible and usually happens only when purchasing a used car. However, if you have enough money in your savings account, it is entirely possible to buy a new car with cash and avoid dealing with banks or lenders.

Buying a car with cash doesn’t necessarily mean you are handing over paper money to buy it. It simply means that you are paying the full price upfront. This can usually be done with a cashier’s check, personal check, or debit or credit card.


Pros and Cons of Buying a Car With Cash

The best way to decide whether buying a car outright is a good option for you is to weigh the pros and cons. If you are in the position to choose between buying a new vehicle with either cash or financing, you should know which one is going to be most beneficial to you. A car purchase is a big decision and it is always best to understand your choices.

Pros:

Discounts:
Depending on the dealership you are buying from and the demand for the particular car you are considering, paying cash upfront could end up getting you some good discounts. Oftentimes, you will have the upper hand when it comes to negotiations if you are willing to put down the money all at once. This is especially true if you are purchasing from a private party or a smaller, independent dealership.

Car dealers often want to make room on their lot for new car models, especially if it is around the end of the year. If you are willing to pay cash for an older model and get it off the lot, the salesperson will usually be open to making a deal with you and giving you some discounts. If the car you are thinking about buying is not as in demand as other models, this can give you even more of an upper hand.

No Payments:
Perhaps the biggest advantage of buying a car outright is the fact that you will not be faced with any monthly payments. You can get the car you want and drive it off the lot without having to pay anything else after the deal is done. This can be very helpful if you already have payments you are making on something like a home loan or student loan.

No monthly payments also mean that you will not be paying extra due to the interest. When you get a car loan, the interest will be added to your payments every month. This can quickly add up and you will end up paying a lot more in total interest for the car in the long run.

Lower Price:
Because you will not be making any interest payments on a car you buy with cash, you will end up paying a lot less for the vehicle overall. When you get financing, the finance company uses the interest to make money on your purchase. Even if you get a low-interest rate, you will usually end up paying less if you buy the car in full.

As of 2022, the average interest rate on a car loan is 3.64% for new cars and 5.35% for used cars. Depending on what the list price of the vehicle is, the loan term, and your credit score, you could end up paying hundreds if not thousands of extra dollars for a car by getting a loan. Paying for a car with cash is often going to be the best choice.

Stay Ahead of Depreciation:
When you buy a car, it will immediately start depreciating. If you have interest payments to make, this means that you are going to end up owing more on the car than it is worth very quickly. This is called having negative equity or being “upside-down” on the car. When you pay cash for a vehicle, it is still going to depreciate but you will not have negative equity as quickly as you would if you were paying interest. This helps you stay ahead of the depreciation of the vehicle as time goes on.

Cons:

Saving Difficulties:
Perhaps the biggest downside of buying a car with cash is the fact that you have to save the money to make it happen. Even a used vehicle can be very expensive and not everyone can save up the amount of money needed to purchase a car outright. Because of this, paying cash and forgoing a car payment is just not possible for many people.

For many people, having an emergency fund is incredibly important. If you buy a car with cash, you may deplete your savings and could be left with nothing in the event of an emergency. If you aren’t in a financial position to buy the car and have money left over in your bank account, it may not be a good idea.

Not Building Credit:
One of the benefits of having a car payment is that it can help you boost your credit score. Having good credit is essential and accounts like auto loans can go a long way towards improving your credit. In fact, many peoples’ credit score goes down after they have paid off their loan.

When you apply for your car loan, you may notice that your score drops slightly. This is because when the car dealership runs a credit check, it will count against you. However, the more you make your payments on time, the more your score will go up. Paying cash for a car won’t improve your credit and could be a missed opportunity for you.

No Financing Deals:
Sometimes, dealers will run deals on financing, especially if they are trying to make room on the lot. These deals could be in the form of incredibly low-interest rates or extra incentives that you could miss out on if you are paying cash. It should be noted that these deals will usually only be available if you are getting financing from the dealer and not from a third-party bank.

Depending on the financing deals that are available at the time you are shopping, the price difference between getting a loan and paying cash could be very little. Many times there are rebates available for people who finance vehicles. In these cases, you could end up paying less money if you get a loan.

Return Exceptions:
Most of the time when buying a car with cash from a dealership, you will not be able to return it if you are paying cash. Cash deals are generally final and you could end up being stuck with a vehicle you aren’t happy with should you change your mind. This is why it is so important that you do as much research as possible when buying a vehicle with cash.

However, if you purchase a car with financing through the dealership, you can usually return it or do a trade-in if you decide it isn’t the right vehicle for you. Of course, this will depend on the dealership you are working with and the terms of your specific loan but it is always best to try and leave this avenue open in case you change your mind about your purchase.


Tips for Paying Cash for a Car

If you have decided that paying cash for a car outright is the best option for you, it can be helpful to know how to get the best deal. Considering every option is important and can allow you to get all the benefits of paying cash without dealing with some of the pitfalls. By knowing how to navigate the different options, you can get a good deal on your next car.

Save as Much as Possible:
The most important thing when paying cash for a car is to save as much as you can without depleting your emergency fund. Even if you are buying a used car from a private seller, your best bet will be to purchase the newest model you can afford with the fewest miles on it. While it may take longer to save up the money you need, you will end up getting more use out of a car that is newer and has fewer mechanical problems.

Shop Around:
The best thing you can do when purchasing any car is shop around and look for the best possible deal. This is especially true if you are paying cash. Research different automakers and find out which vehicles are the most reliable and will give you the most longevity. The sale will most likely be final if you are buying the car outright, so being armed with knowledge is always going to be your best bet.

Choose Between a New and Used Car:
When purchasing a car with cash, you will need to decide whether a new or used car is within your reach. In most cases, a new car will be far too expensive for someone to purchase outright but it is possible with different deals and rebate options. If you are able, buying a new car will be your best bet and give you the most years of service. However, the right used car can also be incredibly reliable and save you some money as well.

Understand Trim Levels:
If you are going to buy a new car with cash, it is a good idea to understand the different available trim levels. Trim levels are different categories of the same model of the vehicle and come with various add-ons and options. The base trim level of a car is going to be less expensive than some of the upper levels so that may be the right choice if you are going to be buying the car outright. Even though you won’t get options like leather interiors or more powerful engines, a base-level car will be much more affordable.

Prepare for Extra Costs:
Whenever you are buying a car, you need to consider the extra costs that come with it. Things like sales tax, car insurance, and fees will add up quickly and if you are paying cash, you will need to consider these things. This is why it is best to shop around and find out what your total cost will be once you make the purchase.


Final Thoughts

Even with all the available financing options, buying a car with cash could be a great choice. Knowing that you can simply drive off the lot and own your car outright is a good feeling and can be a major incentive to take the time to save up. Understanding everything that comes with paying cash for a car can help you be prepared when the time comes and get the best possible deal on your new vehicle.