Should I pay cash for a new or used car?
- Paying cash can save interest payments
- Don’t tip your hand early
- Be sure you can afford the outlay
If you plan to buy a new or used vehicle for cash, there are advantages and disadvantages. But if you decide to pay cash, don’t tell the dealer in advance -- the car’s price might jump one thousand dollars.
Before the pros and cons of using cash are discussed, let’s explain why dealers hate the word “cash.” It’s simply a lost opportunity to make a profit on a car loan and it creates a thorny if not impossible hurdle to sell accessories, another revenue stream.
“Accessories sell really good if the customer is financing because you can say it is only $5, $10, $30 per month more for the accessories. But when you tell the customer it will be an extra $2,000 and he is writing a check for $40,000, he says, ‘ah, I don’t need that,’ ” said a dealer who asked not to be identified. In this case, the dealer has lost the opportunity to make $200 to $500 profit on the accessories and possibly even more on an optional extended warranty that might sell for $2,500-plus.
The car loan is another lost opportunity. A dealer generally makes 1 percent of the loan’s value for contacting the financial institution and handling the paperwork. The dealer makes $300 on a $30,000 loan, for example.
Add it all up and it is real money the dealer likely won’t be receiving. It is important before shopping for a new car to do your homework – sticker price vs. invoice, incentives if applicable, the value of your trade-in, dealer reputation, etc. Calculate what you expect to pay for that new vehicle. Again, don’t tell the salesperson in advance you plan to pay cash. The dealership may boost the car’s price by over a thousand dollars to make up the lost profit from not selling accessories and the extended warranty as well as not handling the loan.
Listed below are the pros and cons of paying cash for a new or used vehicle.
No interest payments: No loan, no interest, no monthly payment -- you likely will avoid spending more money than you can afford.
How to pay: 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 is required to tell the IRS any amount of cash that exceeds $10,000. This requires your name, address, etc., lots of paperwork. The dealer prefers a cashier’s check for the amount exceeding $10,000 if you are going to use some cash.
Use cash and a loan: You plan to purchase your first car, it doesn’t matter if it is new or used for this example. You have the cash to complete the sale. However, instead of paying cash it would be wiser to get a loan for a portion of the car’s transaction price so you can establish a credit history, assuming you do not have a history. It does not have to be a big loan and you could pay it off quickly, say six months.
Home equity loan: 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.
Limited selection: It is certainly a good feeling to buy a car for cash 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 wider selection of vehicles to choose from.
Low-interest rate: At times, a brand will offer a low interest rate, maybe no interest at all on a new vehicle. Sometimes there might be a significant rebate if the buyer finances the vehicle through the financial institution that is tied to the automaker. Skipping this offer could be a missed opportunity.
Used vehicle: If cash will be used to purchase a used vehicle, you need to have enough money set aside to handle unexpected repairs and normal maintenance.
Don’t buy if you’re living paycheck to paycheck: Some buyers are financially squeezed, nearly every nickel each month quickly disappears to pay bills. If available does it make sense to use savings in that rainy day fund, that retirement account to buy a vehicle for cash? Probably not.
Investment opportunities: When you take cash out of your accounts to purchase a car, you reduce your investment opportunities in certificates of deposit, mutual funds, individual stocks, etc. A loan might make more sense to save your investments.