Should you pay cash for a new car or used car? The short answer is that if you have the money, it's almost always a better idea than financing. The main reason being that paying cash for your next car is less expensive than financing.
Owning a car all by itself is an expensive undertaking. 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, of course, includes everything required to keep a car going, from auto insurance to maintenance and buying fuel. But owing money on a vehicle makes it even more expensive.
Five Reasons to Pay Cash For a Car
Reason 1 - You'll Spend Less
There's no doubt that it will feel tough to empty your savings account to buy something as expensive as a new car while knowing that it will go down in value. That alone will make you reluctant to buy a costly vehicle. Financing a car makes it psychologically more comfortable to spend more money. 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 price of the car at the end of the car loan.
Reason 2 - Paying Cash Can Give You Discounts
There are a few ways this can happen, depending on where your car buying adventures take you. 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.
Reason 3 - No Interest Rate
The most obvious way that paying cash for a car makes financial sense is not having to pay interest. For example, if you finance a car that costs around $12,000 at an interest rate of just below six percent, 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.
Reason 4 - Financial Discipline
Paying cash is also a good way to improve your financial discipline. Getting out of the cycle of just affording monthly payments keeps your finances healthier. It also helps you know what you can afford. That can quickly translate to other parts of your life as well.
Reason 5 - Establish Priorities
Paying cash also makes you think about what you need in a car. Generally, you won't get as nice of a car paying cash as you would if you financed, but it will be yours free and clear. It can help you save money by not springing for helpful but useless add-ons or luxury features that you don't need. It can also help you prioritize your other financial goals at the same time, especially if you're dealing with credit card or student loan debt.
Paying Cash For a Car
It's easy to discuss paying cash for a car, but how can you do it? Start by figuring out realistically what you can afford. This is where most people let the car dealer or the finance people take over. Unfortunately, these parties don't know your financial health and are more interested in making money themselves. Once you know exactly how much you can afford, it's time to narrow it further by deciding how much you should afford. It varies in every situation and will depend on your current debt, your savings goals and the amount of your monthly income.
What To Know About Paying Cash at a Car Dealer
If you decide to pay cash for a car and are shopping at a car dealer, there are some essential things to know about the experience. One of the top things to understand is that a lot of dealers won't give you a better deal for paying cash. This is due to the dealer reserve money that they make on loans. What happens here is that they get you approved for a loan and tell you that it's 4.5 percent for 60 months. In truth, the interest rate is 3.5, but they get to keep the difference. That is a completely legal practice and most car dealers do it. The other thing to realize is that a car dealership considers you a cash buyer in any instance where you're not financing through them.
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?
Even though some car dealers might be cold towards cash buyers, smart dealers know that it generally means a fast sale and good reviews if the customer is treated 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, but another idea is to say that you have your own financing and are open to other options. 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 significant discount on the vehicle. For instance, if the vehicle 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
The main advantage of paying cash for a car is not having a monthly payment. Another advantage is that you'll own the vehicle free and clear and are open to buying your own auto insurance and not what the finance company will have you buy. 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 con 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 probably 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's selling for. You can then employ a manual or automatic savings program to deposit an amount every month to work up to having enough money to pay cash.
Negotiating With Cash
As previously mentioned, many car dealers really want you to take their loans as it yields extra money for them. However, most car buying advisors will tell you anyway to always negotiate the firm final price of the vehicle 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 that you want and then tell them you're paying cash.
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 several other fees they may include, but those are usually always negotiable into the final purchase price of the vehicle. 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 major benefit of paying cash is that you have the option to look at private party sales with full freedom. Used car loans may have several restrictions on age and mileage that will reduce your options in terms of what you want to buy. For example, if you're looking at vehicles known to get very high mileage such as a Toyota Camry or a Jeep Wrangler TJ 4.0, then you might be looking at vehicles with well over 100,000 miles. Unfortunately, it might be complicated 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 sites like Craigslist, Facebook Marketplace and Autotrader, among others.
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 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 that you're qualified. A seller with nothing to hide won't mind having the car fully inspected. Start negotiating with the lowest reasonable offer and then move up. Don't give any indication of what your maximum price is or what you're willing to pay. 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 DMV on what exactly is required, but it's crucial to get a receipt. A sales contract should include the following:
- Date of sale
- Current mileage
- Sale price
A good idea 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 vehicle 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 themselves before selling the vehicle. It's also a good idea to see the seller's ID and make sure that they are authorized to sell the vehicle, i.e., that they're the owner.