Buying A Car With Cash: The Pros, Cons, & When To Tell Your Dealer
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You’ve worked hard and saved up for the longest time, and now you’re ready to buy a new or used vehicle. Then, you find the perfect one that fits your needs and budget. Now, you’re probably asking: should I pay cash or take out a car loan?
We’ve all heard before that “cash is king” when buying a new vehicle. It’s evident that many consumers see the benefits of holding on to their cash and go with financing instead. Although buying a car with cash sounds ideal, according to Experian data, 85% of all new car purchases and 36.8% of used vehicles were financed through a loan or lease.
So should you buy a car with cash? Buying a car with cash has its pros and cons, which we’ll highlight in today’s post. We break down everything you need to know to help you make the right decisions.
The Pros and Cons of Buying a Car With Cash
One of the most compelling reasons to purchase a new set of wheels with cash is to avoid monthly payments and high APRs. With that said, there are other benefits of buying a vehicle outright rather than financing. On the other hand, there are risks and drawbacks to cash vehicle purchases.
Pros of Buying a Car With Cash
You won’t pay interest
One of the top reasons why people go for cash purchases is to avoid paying interest on a car loan. Carandriver says the average interest rate on a car loan is 4.07% for new vehicles and 8.62% for used cars. Depending on your credit score, these percentages can be lower or higher. For example, if you buy a car for $30,000 with a $5,000 down payment, you’ll need to take out a $25,000 loan. If the auto loan comes with a 4.5% interest rate and a 60-month payment term, you’re looking at a total loan interest of $2,964.
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You protect yourself from overspending
When you buy a car with cash, you’ll use the money on hand to cover its price tag, forcing you to stick to your budget. With an auto loan, you tend to focus more on the monthly payment than the car’s overall price. Thus, there’s the possibility that you’ll spend more than you’ve planned. Since you have the mindset that your monthly payments are way less than putting down all your cash on a vehicle, you might get carried away with upgrades and accessories or even opt for a different and more expensive car altogether.
You’ll end up spending less
Aside from not having to pay interest from monthly payments, having cash on hand gives you leverage when it comes to price negotiations. Although paying for a vehicle outright doesn’t guarantee you’ll receive considerable discounts, it’s still easier to negotiate since you know what you can afford. The dealership knows that you’re a serious buyer. In many cases, the salesman will be happy to budge from the asking price for a guaranteed sale.
Protip: It might be better to hold off from telling the dealership that you’re paying cash, which we’ll discuss more below.
You already know what you can afford
Taking out an auto loan makes car shopping more overwhelming because it opens up possibilities. You might fall into the trap of adding more wiggle room to your budget limit and opt for a more expensive model or trim level – all because you think that you don’t have to put down a lot of money right away. With cash in hand, you’ll have to stick to what you can afford, which makes finding a car a lot easier.
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Cons of Buying a Car With Cash
You may deplete your cash reserves
Buying a car with cash is hard because it pulls money from your life savings for an asset that will go down in value. Of course, depending on how much money you have in your savings account, paying cash for a new vehicle could drain your savings, leaving you vulnerable in emergencies. Unless you have a lot of cushion in your savings, it may make more sense to use your cash for a larger down payment and reduce the interest you’ll have to pay.
You’re not building your credit
If you care about building your credit, paying cash for a new set of wheels won’t help you much. Since you’re not building your credit now, you may find it more challenging to secure a loan in the future, or at least one with favorable terms. Financing a car purchase lets you build your credit by making regular loan payments.
You may miss out on special financing terms or offers
Buyers with outstanding credit scores may miss out on special financing terms, lower interest rates, rebates, and other special offers. Dealerships often sweeten the pot to compel potential buyers to sign up for financing. These perks are generally left out if you tell the salesman you’re paying cash. A good rule of thumb is to compare the savings from these offers on auto loans versus the savings from paying cash.
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Should You Tell the Dealer You’re Paying Cash?
No. Having enough cash to buy a new or used car is fantastic. But this is where we discourage you from oversharing. Blurting out “I can pay cash” to a car salesperson is a good way to kill the good deals and special offers coming your way.
With such a saturated and competitive industry, dealerships’ margins on car purchases become slimmer by the day. In reality, dealerships profit more from financing deals on new or used cars. The allure of guaranteed sales from cash purchases isn’t enough anymore. By telling your car salesman you have cash and won’t finance, they may charge you more to make up for the difference.
If the salesperson asks you if you’re paying cash or financing, let them know that you’re undecided or wish to hear about their financing deals.
So when should you tell the dealer?
First, use your negotiation skills and exhaust all avenues to secure the best deals possible. Once the final price is negotiated, you let them know you’re paying cash.
Buying A Car With Cash: Frequently Asked Questions
Q: What are the advantages of buying a car with cash?
A: Buying a car with cash can offer several advantages, including no interest payments, full ownership from day one, potential discounts from the dealer, and a simpler purchasing process without the need for credit checks or loan approvals.
Q: What are the disadvantages of buying a car with cash?
A: Some disadvantages may include depleting a significant portion of your savings, missing out on potential investment opportunities with that cash, and the lack of credit-building opportunities that a car loan might provide.
Q: When should I tell the dealer that I’m planning to pay with cash?
A: It’s generally advisable to negotiate the price of the car first before disclosing your intention to pay with cash. Some dealers may offer better financing deals, so revealing your payment method too early might affect your negotiating power.
Q: Is buying a car with cash always the best option?
A: No, it depends on individual circumstances. While paying with cash eliminates interest and offers immediate ownership, financing might be a better option for those who want to preserve cash flow, invest the money elsewhere, or build credit.
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