Fast facts about paying cash for a car
- Even if you have the money available and can pay cash for a car, consider all options for what is bestyour financial situation.
- Dealersencourage financingbecause they can benefit if buyers get loans from the financial arm of the car manufacturers.
- Negotiate the best price in advancetell the dealer if you want to take advantage of financing or pay cash for your next car.
If you're shopping for a car, you may be wondering whether it makes sense to pay cash for a new or used car. The answer may be: there are pros and cons.
Read on to learn more, but here's the key takeaway: Waiting to tell the dealer is crucial if you decide to pay cash for a car. You may pay more for the car if you indicate early in your conversation how you want to pay.
- Can you use cash to buy a car?
- Why dealers choose financing over cash offers
- 3 tips for paying cash for a car
- Pros and cons of paying cash for a car
- Cash payment for a car
Can you buy a car with cash?
Yes, you can pay cash for a new or used car. But when you buy a vehicle, the broader meaning is that you are not financing the purchase with a car loan. Instead, give a check or arrange a bank transfer with your bank. A dealer is unlikely to accept a personal check or credit card as payment for a car on his lot.
But even if you can, that doesn't mean you have to pay cash for a car. There are many factors to consider and everyone has a different financial situation.
Why dealers choose financing over cash offers
But before we discuss the pros and cons of using cash for a car, let's first discuss why salespeople at dealerships don't always like the word "cash." For a dealer, a cash sale can mean a missed opportunity to receive commissions on car loans or extras such as accessories and aextended warranty.
For example, after a cash buyer has negotiated the price of a car, he is less likely to add accessories and other extras because these items can significantly increase the buyer's bottom line. On the other hand, if the same customer takes out a loan through the dealer or the automaker's financing department, the extras and accessories will only increase their monthly bill by a small amount. Generally, a dealer makes about 1% of the loan value, for example about $400 in commissions on a $40,000 loan.
But there are also good reasons to pay cash for your next new or used car. We will discuss these reasons in our pros and cons below. In the meantime, remember three important cash payment tips before you arrive at a dealer's showroom.
3 tips for paying cash for a car:
- Don't contact us too early. Negotiate the best price before the seller knows you won't finance the purchase.
- Make sure you can afford the out-of-pocket expenses. Buy a car that suits your needs and don't part with more money than you can comfortably live without.
- Think of offers or optionswhich come with available financing offers before you decide. Attracting additional discounts when you use dealer financing can offset parting with a large portion of your savings account.
Before you buy onethe bill, you have to do your homework -Sticker pricevs. invoice, incentives, if applicable, yourexchange valueand interest rate agreements for loans.
Calculate what you expect to pay for the new vehicle. Again, don't tell the seller that you plan to pay cash before negotiating. The dealer can increase the price of the car by more than $1,000 to make up for lost profits by not selling accessories or the extended warranty and not servicing the loan. A great approach is, “I won't know whether to pay cash or finance this car until I hear all the options.”
Pros and cons of paying cash for a car
Benefit
No interest payments
Saving on interest can sometimes add up to thousands of dollars in savings when you buy a car with cash. For example, you would pay $10,186 in interest if you finance the purchase of a car for $48,247 (thethe average price of a new carin November 2023, according to Kelley Blue Book) with a 20% down payment at an average interest rate of 9% in e.g. Florida with a 6% sales tax on a 60-month loan term.
Use what you can afford
When you pay cash for a new or used car, you'll likely spend moneywhat you can affordand no more. Of course, if you buy a $45,000 SUV, you can take shopping bags full of $100 bills with you. However, federal law requires the dealer to notify the IRS of any amount of cash in excess of $10,000. This law requires that your name, address, etc. be on all paperwork. Remember, most dealers prefer itreceiptfor high amounts if you plan to spend some money.
Directly owns the car
Once you purchase the vehicle with cash from your bank account, it's all yours, freeing up your other (and future) cash and income for other things. No debts have been accrued.
RELATED: Think about oursPrivate seller exchange marketplacewhen you buy a car peer-to-peer.
Cons
Limited selection
It actually feels good to pay cash for a car, but your cash may not be enough to buy the car or truck that meets your needs. It's A herecar loancan be the better option, giving you a wider range of vehicles to choose from.
Missed opportunity for incentives
Manufacturers often offer buyers with excellent credit scores lower interest rates and sometimes no interest on a new vehicle. Dealers can bidsignificant discounts and incentivesif the buyer finances the car through an institution linked to the car manufacturer. Skipping this offer could be a missed opportunity.
Tip: In most cases, you can pay off a loan without penalty once the lender has created your account. So if you qualify for a loan and qualify for incentives, consider taking advantage of these savings, knowing you'll pay off the loan balance in just a few weeks. It is critical that you read and understand the lender's terms and conditions before considering this tactic.
More repairs are needed on used cars
like youpay cash for a used carMake sure you have enough money set aside to cover unexpected repairsplanned maintenance.
Limited financially
Most car dealers can't simply withdraw tens of thousands of dollars from their bank accounts. Some buyers live paycheck to paycheck to pay bills or face other financial obligations that prohibit large cash transactions. If one is available, does it make sense to use a retirement savings fund or rainy day fund to pay cash for a vehicle? Absolutely not. Never exceed your budget for a car.
Reduced options
When you accept cash Withdrawing from your accounts to buy a car reduces your potential investment options in stocks, mutual funds, etc. A loan may make more sensesave your money for investments. Remember, it's a new carvalue decreasesonce you buy it.
Does not build your credit history
You won't add anything to your credit history if you pay cash to buy a new or used car, nor will you contribute to a good credit score. Building solid credit may be necessary if you plan to buy or refinance a home or other major purchases that require a credit check and a verifiable credit history. Financing through a bank or dealer is a way to show that you are a good borrower or increase your creditweak creditworthiness.
Cash payment for a car
Weigh your options when deciding whether to use cash to pay for a new or used car or to finance your purchase and spread the monthly payments over several years. Each method has pros and cons, but the most important consideration is your personal finances and whether you can (or want to) handle a significant withdrawal of your savings for another vehicle.
Related car buying stories
- How to buy a used car in 10 steps
- Hidden financing costs when purchasing a used car
- How to buy a car online
Editor's note: This article has been updated since its original publication. Rick Kranz contributed to the report.
