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When it comes to buying a car, there are many different options available to you.
You can buy a car with a loan from a bank, you can lease a car, or you can buy a car outright with cash.
Each option has its own set of pros and cons that you have to consider.
In this post, I walk you through the pros and cons of buying a car with cash.
By the end, you will have a better idea if this option makes sense for your financial situation.
11 Important Advantages and Drawbacks Of Buying A Car With Cash
6 Pros Of Buying A Car With Cash
There are a lot of benefits of paying cash for a new car.
Here are the biggest ones you need to know.
#1. No Monthly Payments
One of the worst things about buying a car is that you are on the hook for monthly payments.
Depending on how long you take the auto loan out for, you are looking at making a monthly payment anywhere from 4 years up to 8 years.
Not only does this reduce your cash flow that could otherwise be put towards savings, retirement, or other financial goals, but it limits you.
This is because you don’t know what the future holds.
Maybe things happen at your work and you are no longer happy.
You would love to change careers, but since you have a $500 car payment, your options for a new job are limited.
By paying cash for a car, you don’t have this monthly obligation to worry about.
#2. Save Money On Interest Charges
Unless you have excellent credit and qualify for a special financing 0% auto loan, you are paying interest.
And that interest adds up over time.
For example, if you take out a $30,000 car loan for 5 years at 4% interest, you are going to pay $3,150 in interest charges.
In other words, the $30,000 car is actually costing you $33,150.
If you pay cash for the vehicle and invest the monthly payment for 5 years, you end up with over $8,000 thanks to compound interest.
The total amount you have in savings is $42,007.
If you do decide to take out a loan, make sure you look at the loan term.
A lot of car salesmen will extend this to 6 years or more to get your car payments lower.
The problem here is since cars depreciate, you might owe a lot more on the car loan than the car is worth as it gets older.
Then when you go to trade in the vehicle, you either have to come up with the cash to pay off the loan or you roll the balance into a new loan.
Do this a few times and you have a mountain of negative equity in a brand new car.
#3. No Need To Qualify For A Loan
When you use cash to buy a car, you don’t need to worry about your credit history as you don’t need to qualify for financing.
In order to get low interest rates, you need to have a good credit score.
If you your credit isn’t the best, you might have a hard time qualifying for good interest rates.
This could end up costing you more over the life of the car loan.
#4. Lower Car Insurance Premiums
When you buy a new or used car and finance the purchase, your insurance coverage tends to be higher.
This is because you don’t own the vehicle outright, the bank or credit union does.
When you buy a car with cash, your insurance premiums tend to be lower because you do own the car.
So not only does paying cash save you money by not paying an interest rate, it saves you money on insurance costs too.
#5. More Negotiating Flexibility
Regardless if you buy a new or used car, when you pay cash, you have more flexibility when negotiating the car price.
This is especially true if you buy from a private seller.
They would rather you pay for the car with cash as they don’t have to worry about if the check you are paying with is real.
Plus, it is less of a hassle on your end too.
A smart private seller will want a cashier’s check or some proof the check is legitimate.
This makes the vehicle purchase less risky for them.
#6. No Overspending
Finally, when you pay cash, you cannot overspend.
If you have $25,000 you can only make a car purchase for that amount or less.
When you opt for financing options, you can overspend.
You might want to spend $25,000 but the dealer shows you the top of the line version of the brand new car with all the bells and whistles.
Then he works the monthly car payment to be an amount you can afford.
Before you know you it, you are buying a $35,000 car.
If you do decide to finance a new vehicle, make sure you know your purchase price and don’t focus on the monthly payment amount.
This costly mistake ends up hurting a lot of car buyers.
5 Disadvantages Of Buying A Car With Cash
As great as paying cash for a car is, there are some valid reasons why you might want to consider other financing options.
Here are the reasons to consider.
#1. Could Wipe Out Your Savings
You might be so interested in purchasing a car with cash that you decide to use the money in your emergency fund or other savings account to pay for it.
While you won’t have to worry about monthly payments, you are putting yourself in financial danger.
Should unexpected repairs or other expenses come up, you won’t have enough money to pay for it.
As a result, you might have to take on debt.
And this debt typically will carry higher interest payments that a car loan would.
Do before you decide to pay for your next vehicle purchase with cash, make sure you enough cash in your bank account to cover unexpected expenses, both car related and non car related.
#2. Miss On Chance To Improve Credit Score
When you take out any loans, not just car loans, and you pay the loans back in full and on time, you improve your credit score.
You show future creditors that you are a safe person to lend money to.
If you are paying cash, you don’t have the opportunity to improve your credit score.
Of course there is a work around to this.
If you qualify for low financing or 0% financing, you might want to take out the auto loan.
When you get your first payment, you can take the cash reserves you have for the car and pay off the loan.
This allows you to build credit and still pay cash.
#3. Miss Out On Special Savings
Most car dealers make the bulk of the money on new cars through financing options.
Sure there is a small markup on the price, but more money is made on financing.
This is because the dealer gets kickbacks and bonuses from the car manufacturers for signing people up for car loans.
As a result, many of the advertised discounts are reserved for those car buyers who finance.
While you could negotiate an amazing deal using cash, many times you get a better deal by financing.
So be sure to look at what paying cash versus financing does to the overall cost of the car.
You might find with a low interest rate, financing is a better option.
#4. Opportunity Cost
When you buy a car with cash, you don’t have that money for other purposes.
This is known as opportunity cost and it is part of every decision you make in life, not just car buying.
For example, if you decide to pay cash, you can’t use that money for a vacation or to invest.
Unless you have a lot of money, it is a missed opportunity.
This isn’t to say you should never pay cash when you buy a car.
There are many great reasons to do so.
But you have to look at the whole picture, not just saving money.
It goes back to the earlier example where if you take out a car loan, you pay a couple thousand dollars more in interest.
But if you take the cash for a car and invest it, you end up with a lot more money because your return will be higher than the car loan.
Savvy car buyers look at all aspects of car buying to figure out the best option for their situation and financial goals.
#5. Need To Prioritize Saving Money
Finally, in most cases you don’t have the cash upfront to buy a car.
You need to save it.
And since buying a car outright can cost a lot of money, you could be saving for a long time.
This can discourage many cash buyers and have them opt for financing instead.
For example, even if you save $500 a month, you need to save for 5 years just to get to $30,000.
And seeing how the average new car costs over $43,000 you can’t even buy that.
You might instead have to settle for a used vehicle as your next car.
Why You Should Never Pay Cash For a Car
While there are definitely benefits to paying for a car with cash, they might not be worth it.
Here is why.
Most dealers and car manufacturers make their money when you finance the vehicle.
Here are a few examples of this:
- If the Ford dealer gets you approved for Ford financing, they can get bonuses and kickbacks from Ford
- Ford itself makes money on the interest it charges on your loan
- The more vehicles the Ford dealer moves, the larger the bonuses and kickbacks it gets from Ford
Obviously, they can still earn the kickbacks if they simply sell cars, regardless if you use cash or not.
But it is double-dipping if they can sell a car and use in-house financing.
Because they want you to use this financing, they tend to offer sweeter deals.
These deals could include a lower interest rate, a cashback bonus, or both.
When we were deciding on a new Chrysler Pacifica, we had to decide between financing and paying cash.
We ended up choosing financing because in doing so, we could take advantage of an additional $2,500 off the purchase price.
Since the financing was 0%, it was a no-brainer.
We took the financing deal but then paid off the loan early since we had the cash available.
For most people this is where the debate between paying cash for a car or not ends.
But for those financially savvy people, you can really dig in here to figure out the best course of action.
Here, you look at the interest rate of the loan and the interest you can earn on your savings.
For example, let’s say you get $2,500 off by financing, but it comes with a 2% interest rate.
If you keep the $40,000 loan for 5 years, you will pay $2,066 in interest.
If you have $40,000 in savings earning 4%, you will earn close to $9,000 in interest.
Remember this is a rough example, but the point is, if you want to get technical, you have to see run the numbers to see which is the best option for you.
But as I said, for most consumers, taking the financing if it comes with bonus cash back and an interest rate of less than 2%, it is usually the smart move.
And if you can pay off the loan early, even better.
Purchasing a car with cash instead of financing it can make more sense for a lot of reasons.
But it isn’t for everyone.
As much as you don’t want to make car payments for years, it could be a smarter financial decision.
The only way to know for certain is to crunch the numbers.
It might not sound like the most fun thing to do, but if you do it, you will make the smartest decision for you and end up saving yourself a lot of money.
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.