Buying Cars With Cash: What You Need To Know

Perhaps you’ve heard it before: The best way to buy a car is in cash. Yet, car buyers financed more than 85% of all new car purchases and 36% of used car purchases in 2020, according to Experian. There are some valid reasons for holding onto your cash and taking out an auto loan instead.

In this article, we’ll look at some key financial considerations so you can know how to buy a car with cash and whether this is the right purchasing strategy for you.

The most common reasons to buy with cash include avoiding financing fees and gaining strong negotiation leverage on the price of the vehicle. However, there are also compelling reasons to finance the car. These include holding onto your cash and being able to trade up to a better vehicle.

Advantages

Debt-free living: The benefits of living without debt seem pretty obvious. Having no debt frees up your monthly income to use for savings, vacations or other investments.

Ownership perks: When you own your car outright, you have much more flexibility when it comes time to sell. That’s because your name is listed on the Certificate of Title. When you sell a car under lien, you must work with the lender since their name is on the title.

Negotiation leverage: If you have cash and play this card at the right time, you have a much stronger negotiating position with the seller or dealer.

No interest payments: Making one cash payment spares you from making interest payments that add up over time. Depending on your interest rate and loan amount, paying in monthly installments – though perhaps more convenient than paying in cash – can mean thousands of dollars in interest.

Disadvantages

Depletes cash reserves: An auto loan lets you keep more actual cash in your bank account – and use it to invest or save for unexpected repairs.

Not building credit: It might be harder to get a loan in the future if you aren’t building credit now. When you finance a car, you can improve your credit score by making regular loan payments. If building good credit is important to you, a small car loan with a short loan term can boost your credit.

Smaller selection: By the end of 2021, the average price on a used car was $28,205 – a 42% increase from December 2019, according to Kelley Blue Book. Used cars, and especially older, more affordable vehicles, are in high demand. You may pay more for a car that won’t last nearly as long as a newer model.

Dealer overpricing: When dealerships know upfront that you are paying cash, they may charge you more. Hold this card close to your chest. When dealers ask you if you plan to pay in cash or finance, you could tell them you’d like to negotiate the purchase price before deciding.

In some situations, there are reasons why you should never pay cash for a car. For example:

Prime financing rates: Some financing options are simply a good deal and too good to pass up. Do the math to find out the total amount of money going toward financing. If it’s under $1,000, an auto loan can boost your credit score and free up monthly income for better investments.

Short loan term: You might be able to boost your credit score by getting a loan with a short-term length. A car loan with a 60-month term that you pay off in 36 months can help you build credit while allowing you to maintain your savings account balance.

Loss of emergency fund: A good financial rule of thumb is to always have an emergency fund that could cover three to 6 months’ worth of expenses. If you won’t have an adequate emergency fund after shelling out cash for a car, you should look for something cheaper, save for longer or finance rather than paying in cash.

As a cash buyer, you’re making an investment in your future. So before making a purchase, be sure to gather as much information as possible about what you need to buy a car. The longer you wait to research, the less valuable your cash might be.

Step One: Decide What Kind Of Car You Need

When you plan to pay in cash, choosing what kind of car to get based on your budget might make the most sense. A purchase within your budget will mean less financial stress.

Alternatively, if you know you need a specific type or size vehicle to meet your needs, you can pursue the option that helps get you into the right car. Depending on how soon you need a car, you can either continue to save or finance your next car.

Step Two: Gather Your Funds

You may look suspicious if you buy a car with cash you’ve hauled around in a duffel bag. When buying a car in cash, you’re most likely going to need to cut a cashier’s check. In fact, the Internal Revenue Service mandates that dealerships report some of your personal information for any cash transactions over $10,000.

If you plan to buy from a private seller, don’t expect them to accept a personal check, either. They’ll likely request that you accompany them to their bank so they can cash the check before handing over the keys.

Step Three: Negotiate For Your Financial Future

Paying cash is a tricky balancing act. On the one hand, dealerships often offer cash discounts to buyers who don’t require financing. On the other hand, dealerships profit from selling warranties and accessories that borrowers are much more likely to consider than a cash buyer.

Our best advice is to negotiate the sticker price of the car before disclosing how you plan to pay for the vehicle. Make sure you know the Kelley Blue Book value of the vehicle you’re considering. Compare that to its market value by browsing similar vehicles for sale.

Ask questions about how the previous owners used the vehicle. If most of its miles are highway miles, its suspension is probably in better shape than one used for start-and-stop traffic, like a delivery vehicle. Also know what to look for when you take a used car out for a test drive. Once you’ve finalized a price, share that you’re a cash buyer and maybe ask for a cash discount, depending how the rest of the negotiation goes.

Your cash can go far depending on where you invest it. Cars inevitably depreciate over time. Decide what’s most important to you: being free of monthly payments by paying in cash or getting into a nicer, more expensive car that may last longer. Depending on how much cash you have, you may be able to have it all.

You can feel confident in your decision when you’ve done your homework on how to buy a car with cash or whether you should pursue this route at all. Consider getting preapproved for a car loan to get a better sense of your options.