When you buy groceries, the cashier probably asks you if you’re paying with cash or a card. The decision doesn’t seem like a big one as you’re standing there. If the same question is asked at a car dealership, the stakes become much higher.
All of the benefits revolve around the freedom and savings that you’ll encounter. By not taking out a loan, you don’t need to worry about interest rates or added tricks that dealerships will attempt. The downside is that you’ll need to have all that money on you, and you can’t spend it on anything else.
That’s right, today I’ll be talking about paying cash for cars. Is it the right decision for you to make? I’ll walk through the major pros and cons of this decision and help you make up your mind.
Different Options for Paying for a Car
When you buy a car, there are really two options to pick from buying it in cash or getting a loan. “Paying cash for a car” could also refer to writing a check to the dealership.
In most of this article, I’ll talk about paying physical cash for a car, since it’s easier to visualize and explain (despite the concept being identical).
Does Cash Work for New and Used Cars?
Yes, cash is a viable option for new or used cars alike. Auto loans tend to have a high-interest rate for used cars since the stakes are higher. This means that you’ll benefit more from buying a used car with cash upfront.
Make Sure You Know You’re Budget
Before stepping foot on the lot, you need to understand your budget. When you’re paying cash, it’s a little more obvious. You can only spend as much money as you have in your account, so that’s the maximum limit of your budget.
Financial experts have a rule of thumb when it comes to getting cars. The total value of your cars should be no more than half of your household income.
That means that if you’re single and making $50,000, you should bring no more than $25,000 with you to the dealership.
Pros of Paying Cash for a Car
I always like to hear the good news first, so let me start with some benefits of paying cash for a car. I actually purchased my most recent vehicle in total with cash, so I can personally attest to these benefits.
You’ll Typically Save Money
In every auto loan, there’s a certain amount of interest. It varies a lot based on your credit, how much you’re borrowing, and who the borrower is, but the interest is always there.
Sometimes a dealership will offer 6 or 12 months of no interest on the loan, but it will pick up right afterward. It could be anywhere from 3% to 10% of the final sticker price.
With cars that cost tens of thousands of dollars, this seemingly small percentage will add up a lot. For reference, 3% of $30,000 is an extra $900 that you’ll need to spend. As the rate gets higher, that value increases as well.
Since you’re paying upfront with cash, you don’t have to worry about interest at all. As a result, that added $900+ just vanishes. It’s a quick way to get a better deal on the same car.
You Won’t Spend Too Much
When you’re discussing monthly payments, it’s easy to get confused and think you’re talking about fake money. It’s also easy to bite off more than you can chew and wind up spending too much for the car.
After all, $500 a month for 6 years seems a lot cheaper than $36,000. This causes people to spend more on a purchase of a vehicle than they need and blow out their budget. Of course, dealerships love when this happens.
When you pay cash for a car, you can only spend as much as you have with you. That means that you physically can’t spend too much unless you also take out a loan for the remaining hundreds or thousands you don’t have on you.
You’ll Avoid Some Common Tricks from Dealerships
One of the most common tricks on a car lot is to talk in terms of monthly payments, not in terms of overall prices. Going back to my previous example, the difference between $500 and $515 a month for 6 years seems laughable — it’s just $15 after all.
I spend more than that on coffee in a single week, so it’s easy to overlook the scale of things.
However, that $15 works out to an extra $1,080 over the term of the loan, not counting interest. Even when I was cramming for midterms, I never spent that much in a single week on coffee.
When you pay in cash, you avoid this trick.
The other trick they’ll do is change the down payment and monthly rate. If you want to get below $300 each month, they’ll have you pay more upfront. Again, this hides some of the math and makes things more confusing. Paying with cash means you don’t have to worry about that.
Forget About All That Extra Math
If you want to be a smart shopper, you’ll do the math to figure out the total price. This involves juggling a monthly payment, a down payment, a term, interest, taxes, and so on. You have to throw it all into an equation in order to get a single number.
It hurts my head just thinking about the math. If you want to forget about the extra math, just bring cash with you. You’ll know that you have exactly $20,000 in your pocket, and that’s all you can spend. During negotiations, you’ll only be dealing with a single number. Makes the math much easier.
It Avoids a Ding on Your Credit Score Today
When the dealership tries to get you a loan, they’ll shop around through a few different loaners. This involves pulling your credit and making a few applications on your behalf. Both of these actions result in a hit on your credit score. It’s typically only a few points or maybe a ten-point reduction, but it’s still annoying.
When you’re getting a loan, your credit score gets penalized. It never made sense to me and always upset me deep down.
With cash, there is no credit score lookup at all. Money is money. The dealership takes all the cash and gives you a car, and that’s that. Credit only matters when you want to take a loan and pay back the money.
No Monthly Payments
When you have an auto loan, you get a monthly reminder that you bought a car. This comes in the form of a monthly bill that you have to pay.
If you don’t automate the payment, this also means having to go through and write a check for your car every single month for years on end. I honestly got pretty tired of seeing the monthly hit on my bank account, and that’s a big reason why I paid cash for my most recent car purchase.
There’s also a certain amount of planning and juggling you need to do if you do elect for autopayments. You need to make sure that you have the money in your checking account before the payment gets processed or else you get hit with a fee from your bank.
In other words, there’s an added level of monthly stress that comes with taking out a loan. Of course, a cash payment will settle your debt upfront, so you don’t carry it with you from month to month.
You Can Easily Sell It Whenever You Want
When you pay cash for a car, you fully own it and you become the sole owner. If you’re paying off a loan, you and the bank both own a portion of it, but the bank technically owns it until the loan is paid off.
If you want to sell your car before it’s fully paid off, it involves additional phone calls and stress. You need to coordinate with the bank, take out another loan to pay off the first loan, then transfer money around. As someone who’s done that process a few times, I can tell you how annoying it can get.
If you own the car in full, all you need to do is get money from the buyer, and then the deal is done (after some paperwork).
Accidents Involve Fewer Hoops
Along the same vein, accidents can also get tricky. This is especially true for leased cars, but it also applies to new cars that are under a loan. Since you don’t own the car, the insurance company won’t be paying you for the damages.
If you haven’t paid off enough of the car, there’s a weird process that happens where you can wind up paying the bank extra money after the fact. If the value of the car is less than the amount on the loan, then you’ll keep paying for a car that was totaled and scrapped.
A paid-off car is more straightforward after an accident. You’re the sole recipient of the insurance payout, so you see all the money.
Can Be Used if You Have Poor Credit
If your credit score is very low, you might be denied a loan. If you’re offered one, you’ll probably see an incredibly high-interest rate, often in the double-digits.
With cash, credit doesn’t matter. Remember, a credit score is just a way of explaining how good you are at paying back the money that you owe. Since you have all the money in your pocket, no payback is required.
To avoid borderline predatory interest rates, you can just buy a car in cash.
Won’t Get Stuck in an Upside-Down Loan
There’s a vicious cycle that happens in car loans when you get upside-down. This is when you owe more on the car than it’s worth, and you sell it for a new car. Since this debt doesn’t just disappear, it’s often carried to the next car.
Let’s say you owe $25,000 for a car that’s worth $15,000 today. You are upside-down 10 grand. When you go to buy a new car and get another loan, that $10,000 carries with you. Now, you take out a loan for a $40,000 car. The loan will be $50,000 since that 10 grand is added on.
If you look into the future, you can expect to be even further upside-down on the new car’s loan. This cycle continues and becomes bigger and more dangerous. This is how people become deeply indebted to auto loan holders. It’s also a quick way to trash your credit score.
With cash, this doesn’t happen. You won’t owe anything on the car, regardless of its price, so you’ll never be upside down.
Much Easier if Shopping Used in a Private Sale
One place where cash is really powerful is in a private sale. Sellers love to hold a handful of crisp, cold, cash. This is due to the process of getting loans and transferring cars in a private sale.
As a reminder, a private sale is when the owner of the car sells it directly to you. It’s just two people involved in the deal, and dealerships and banks don’t have anything to do with the purchase.
The downside is that getting a loan for a private sale is tougher. It’s much easier to have cash on hand that you can give in exchange for a title and a car. It also helps your bargaining power since the seller will prefer cash on the spot.
Cons of Paying Cash for a Car
Even though it’s great to buy a car with cash, there are definitely some downsides. Let me take some time to explain the cons of paying cash for a new or used car.
Some Specials Don’t Apply to All-Cash Purchases
As you’ll better understand in a second, dealerships don’t really love cash. As a result, you’ll notice fewer specials that apply to all-cash purchases.
If you go to your favorite dealership’s website and scroll through their specials, you’ll see the proof for yourself. The fine print almost always outlines the fact that you need to take out a loan for the vehicle.
That means that you can’t get excited over a special you found in the newspaper if you want to pay cash for the car. That special will disappear as soon as you break out a stack of money.
Your Savings Will Get Hit (Hard)
It’s always painful seeing that “-$20,000” pop up on your bank account’s ledger. Since you need to have all the cash with you, you’ll need to take it out of your savings and deplete it by a lot. Mentally it hurts, and it could financially hurt you too, depending on your situation.
There’s no way around it, either. Since you’re not taking out a loan, you need to pay the whole cost of the car at once.
The Cash Can’t Be Invested Elsewhere
The fact is the cash you use to buy a car can’t be invested or used anywhere else. This means that your retirement, college savings, vacation account, and investment portfolio won’t be able to use that money.
This downside becomes more apparent when you compare buying a car with cash to investing it in the market. Almost every car’s value depletes over time (unless it’s a collectible). A car is not an investment. That means that you’ll never recover the money you spend, and you’ll lose most of it.
On the other hand, an investment’s sole purpose is to grow. You could double or triple that amount of money over the life of a car (roughly 15 years).
Every Add-On Hurts Even More
You might not understand the full impact of every bell and whistle you add until you pay for the car in cash. That $500 package for the floor liners and cargo net equates to another $500 you need to put on the table in cash.
These add-ons can be hidden more when you get a loan and pay it back over 5 years. The flipside of this is that you won’t get unnecessary add-ons since you’ll be paying for them upfront.
Dealerships Dislike Counting Cash
I actually received a little backlash when I brought cash with me to the dealership. Since the purchase was above a certain amount of money, they had to include a finance manager and floor manager to double-count the money. Apparently, a cashier’s check would have been a better idea, but I just got too wrapped up in the idea of paying cash.
Dealerships have policies when it comes to counting money. They’re necessary to make sure the salesperson isn’t pocketing a certain amount and lying about the sale price. However, these policies equate to more time waiting and an annoyed staff at the dealership.
It Requires a Lot of Extra Homework
Since you’ll be bringing money with you, you don’t have the luxury of going into a situation blindly. You’ll need to research the perfect make, model, and year. You’ll also need to dig up sales quotes to understand what you’ll actually pay.
It adds up to a lot of extra homework before you leave your house. In my opinion, it’s always good to do your homework ahead of time to get the best deal. It just takes away any spontaneity you’re hoping for.
Building Credit From an Auto Loan
An auto loan is actually a great way to build up your credit score. I mentioned earlier that you might get an immediate hit on your credit score, but that goes away once you start making payments.
There are still a lot of unknowns when it comes down to calculating a credit score, but one thing is for sure: making timely payments on an auto loan will certainly improve your score over time.
Salespeople Get Commissions Based on Loans
In a lot of dealerships, the salespeople get a commission based on the number of loans they sign buyers up for. The interest flows through the dealership, so it’s in their best interest to push loans.
This means that you won’t be making any friends if you buy a car with cash. They’ll be less willing to accommodate your requests or do you any favors. After all, there’s nothing in it for them to sign you up for a new car.
Typically It Can’t Be Done on Leases
When it comes to leases, paying cash is typically not an option. You’ll find that almost all leases are structured on a monthly payment, and they require you to take out a loan. You can put a ton of money down as a down payment, but they might still force you to take out a loan.
Again, this will vary depending on the dealership you go to, but it’s been true at every one I’ve visited in the past decade.
Requires a Lot of Planning and Saving
Here’s the biggest issue that I personally have when it comes to paying cash for a car: you need to plan and save a ton. Maybe it’s just me, but it feels impossible to put away a thousand dollars every month for years on end in order to buy a car in full.
Life tends to get in the way and saving gets tough. An emergency could pop up that sets you back a few months. This would make any sane person frustrated, and it could lead to taking out a loan for a car.
If you’re great at saving and planning for your future, then more power to you. Paying cash would be a great option for you.
Not As Powerful as It Used to Be
There used to be a saying in the auto world: cash is king. It meant that you have way more negotiating power if you have a briefcase filled with cash on the car lot.
Today, it’s sadly not the case. Cash isn’t as powerful as it used to be when it comes to buying a new car. In fact, it might be seen as a burden for some dealerships.
A few decades ago, you would have been told that you shouldn’t divulge that you’re paying in cash until the negotiations already started. It was the wildcard up your sleeve that would get you a massive discount once you disclosed it.
That’s not how it works anymore. Some people still believe it, but every salesperson and dealership that I interviewed said the complete opposite. Why am I bringing this up? I don’t want you to think you have an ace of spades that will swing negotiations in your favor. Cash is just as good as a check or loan when it comes to working out a price with the salesperson.
Which Is Right for You?
Now it’s time to decide: do you want to pay cash for a car or get a loan?
For buyers who want financial freedom, have the cash available, and want to avoid paying interest, paying cash is a great option. It’s especially useful in private sales, and it makes things easier in the case of an accident or if you have bad credit.
If you don’t want to do the extra homework, deal with angry salespeople, and pick a purchase over a lease, then maybe you should get a loan. The loan will let you comfortably put on more add-ons, invest your cash elsewhere, and cash in on some specials the dealership is offering.
A Healthy Alternative: Get a Loan then Pay it Off Quickly
There’s a third option that I didn’t mention. You can take out a loan for the car, then pay it off very quickly. In a lot of ways, it combines the best of both options.
How does it work? You take out a loan like normal with the dealership. You’ll cash in on any incentives they have for taking out a loan. You can comfortably negotiate the monthly and down payments. You’ll even get the salesperson a nice little commission on the sale.
Once the paperwork is finalized, you can turn around and write a check to the loaner, paying off the loan in full. Some dealerships might have a certain time period that you need to wait before paying off the loan, but it’s uncommon.
In this option, you still have all the cash needed in your bank account. It also means that you avoid any interest on the loan since you’re paying it before the interest kicks in. At the same time, you’re reaping the benefits of taking out a loan through a dealership. Bonus points if you use a credit union for the loan in the first place.
There you have it. I just discussed everything you need to know about paying cash for a car. Specifically, I walked through the major pros and cons of paying cash.