If you plan to buy a vehicle, you’re probably wondering if paying cash for a new or used car makes sense. The answer is, there are advantages and drawbacks. And, if you decide to pay cash, it’s important not to tell the dealer in advance. There’s a possibility you will pay more if you mention it.
But before discussing the pros and cons of using cash, let’s discuss why dealership salespeople don’t always like the word “cash.” For a dealership, a cash sale could mean a lost opportunity to receive commissions on car loans or extras like accessories and an extended warranty.
For example, after a cash buyer negotiates the price of a car, adding accessories and other extras is less likely because those items can significantly increase the purchaser’s bottom line. On the other hand, if the same customer takes on a loan payment, the extras and accessories would only increase their monthly bill by a small amount. Generally, a dealership makes around 1% of the loan’s value — for example, about $300 commission on a $30,000 loan.
But there are also some good reasons to pay cash for your next new or used car. We will cover those reasons in our pros and cons below. In the meantime, remember three critical tips for paying cash before you arrive at a dealer showroom.
Before shopping for a new car, it is essential to do your homework — sticker price vs. invoice, incentives if applicable, the value of your trade-in, and loan interest deals.
Calculate what you expect to pay for that new vehicle. Again, don’t tell the salesperson before negotiating that you plan to pay cash. The dealership may boost the car’s price by over $1,000 to make up the lost profit from not selling accessories and the extended warranty and not handling the loan. An excellent way to approach it is, “I don’t know if I’m going to pay cash or finance this car until I hear all the options.”
Saving on interest can, in some cases, be thousands of dollars in savings to your bottom line when buying a car in cash. For example, you would save at least $5,200 on interest than if you financed the purchase of a $47,077 car (the average price for a new car in December 2021, according to Kelley Blue Book) in, say, Florida with a $3,000 down payment and 6% sales tax over a loan term of 60 months.
When you pay cash for a new or used car, you’ll likely spend what you can afford and not more. If you are buying a $45,000 SUV, of course, you can bring shopping bags filled with $100 bills. However, under federal law, the dealer must tell the IRS any amount of cash that exceeds $10,000. This law requires your name, address, etc. It’s lots of paperwork. Just remember, dealers prefer a cashier’s check for any amount exceeding $10,000 if you’re planning to use some cash.
Once you purchase the vehicle, it’s entirely yours and frees up your other cash for other things. No debts accumulated.
It is indeed a good feeling to pay cash for a car, but your cash resources might not be enough to purchase the car or truck that fits your needs. That is where a loan might be the better option, giving you a more comprehensive selection of vehicles from which to choose.
A brand will sometimes offer lower interest rates or maybe no interest at all on a new vehicle. Dealers might offer significant rebates if the buyer finances the car through an institution tied to the automaker. Skipping this offer could be a missed opportunity.
If you pay cash for a used car, make sure you have enough money set aside to handle unexpected repairs and routine maintenance.
Some buyers live paycheck to paycheck or face other financial obligations. Nearly every nickel each month quickly disappears to pay bills. If available, does it make sense to use that retirement account savings in that rainy day fund to pay cash for a vehicle? Probably not.
When you take cash out of your accounts to purchase a car, you reduce your potential investment opportunities in stocks, mutual funds, etc. A loan might make more sense to save your cash for investments.
When paying cash to buy a new or used car, you’re not adding to a good credit score. Building solid credit could be necessary if you’re planning to purchase or refinance a home or other big-ticket purchase that requires a credit check and history. Financing through a bank or dealership is one way. A home equity loan is another option to consider. As long as the interest rate on your home equity loan is lower than the rate offered by the dealer or financial institution, go for it.
