Get to know the pros and cons of paying for a car with cash. We break down everything you need to know to make the right decision when buying an automobile in cash.
Should I Pay with Cash or Finance a Car?
First, you might wonder, should I pay cash or finance my vehicle?
Before we get into the question of cash versus financing, a little background is in order for shoppers who haven’t had much experience buying a new car.
Here’s the deal, when it comes to buying a car, you can either finance the car with a loan and pay it off over time, or choose to pay cash. That means you’re free and clear of interest and monthly loan payments.
One good reason why some people buy cars in cash is that they can afford to. And when it comes to knowing which is better to do, it comes down to knowing what’s better for your personal situation and finances.
However, do weigh the parameters of the deal. The reason: Car dealers often offer special cash bonuses or low-interest rates for those with good credit. At times, dealers even offer 0% financing. If you think you can get more bang for your buck by investing the money that you would put toward a vehicle, it’s definitely a consideration, especially if your finances look good with ample cash flow.
For example, say you want to buy a $25,000 car and you can afford to purchase it with cash. If you want to spend your cash, that’s great. It means no car payment for you. But let’s say you shop around for a good interest rate and end up with 1% financing for 3 years after a $5,000 down payment.
In that case, you’ll keep your leftover $20,000, and while you have a car payment, the total interest comes to just $300. The question you must ask yourself is whether it’s worth $300 to have that $20,000 in your bank account rather than tied up in your car. Most people would rather have the money in the bank or invested, where it’s likely that they’ll quickly earn back the entirety of the loan’s $300 cost.
What If I’m Purchasing a Used Car with Cash?
Buying a used car, as a rule of thumb, means you’re saving money out of the gate. The reason: New cars depreciate as soon as buyers drive them off the lot.
When you buy a used car, paying in cash also brings more savings on the offer price most times. That is, except pick-up trucks, which retain their value. One of the biggest savings for buying a used vehicle comes if you can leverage your cash for a discount on the purchase price while negotiating, just as you would with a new car.
For the buyer of a used car, though it’s important to weigh the cost benefits to your bottom line. For example, would paying for the car outright deplete all your cash? And how long would it take to build up your cash reserves in case of an emergency?
If you prefer to pay cash, be sure you research used car prices before purchasing because it will help you negotiate the best deal — and don’t forget to ask for a cash discount price. We’ll get into more on that later.
Another consideration is the payment difference each month for a new vs. a used vehicle and how that works with your budget. Clearly, used cars may need more repairs down the road, especially if there’s no warranty on the vehicle.
But dealerships often provide extra warranties on top of existing ones, especially if you purchase a Certified Pre-Owned vehicle.
When you buy used from a dealership, though, few offer 0% financing. It’s more common to see low interest rates or other deals, such as no payments for a few months. However, temper your expectations if you do not have good credit.
Also remember, you will still pay extra for the used car during the life of the loan.
Pros of Buying a Car with Cash
- Discounts. Paying for a car with cash often brings leverage during negotiations.
- No car payment. Paying cash upfront means no monthly car payment expense. That’s a big deal if suddenly you lose your job or another expense comes up that needs addressing.
- Spend less money. When you buy a car with cash, there’s no monthly payment or interest. It’s paid for upfront. That means you spend less money, including on interest payments and any potential loan fees.
- Buying within your means. When you purchase with cash, you live within your means and you’re making smart budgeting decisions.
- Power. When you pay with cash, you get the upper hand in the deal. It also means you can easily walk away if you do not feel satisfied.
Cons of Buying a Car with Cash
- Financial hardship. If you need money suddenly for an emergency and your reserves get depleted, it can cause a budget crunch and put your finances at risk.
- Few to no discounts. Dealers sometimes offer cash discounts to buyers who finance a vehicle. When you pay cash, those disappear.
- Miss out on financing deals. If you qualify for a favorable interest rate, paying cash may not be the smartest thing to do because you’ll lose very little money by financing.
- Return policy woes. Most dealers honor returns for cash buyers but check your contract because if you pay in cash, you might not have any recourse if you need to return the car.
- Missed opportunity. If you could invest the cash for a greater return instead of buying the automobile, it’s a missed opportunity. This could be a project in your home or an investment.
- Not building credit. When you buy a car outright and pay with cash, you miss the opportunity of building credit, which can help with other loans down the road.
How to Research What a Car Should Cost
Once you weigh the pros and cons of paying for your new or used car with cash, then it’s time to research car costs.
Tools to Help You Research Car Costs
When researching the cost of a car, it’s important to know that like other retail goods and services, prices can be marked up or down. For cars, it’s important to know there’s the invoice price, or what the dealer pays for the car from the manufacturer. Then there’s the window sticker price, or the manufacturer suggested retail price (MSRP).
As a consumer, you will not know the exact invoice price. But Autotrader offers tools that will help you find out the mark-up price of the vehicle you want to buy.
Start by researching a specific vehicle make and model on Autotrader. On the site you will find car MSRPs. Then, use the car valuation tool. It helps you know the fair market value of the vehicle once you key in the make and model that you’re considering.
From there, you’ll find a suggested purchase price based on factors, including the car’s popularity and the spread between the base price and invoice price. Understand that you could pay a little less than the car’s value or you might pay a little more, depending on market conditions. Either way, this tool offers an accurate representation of where you should expect to be.
Using both tools together helps you determine new and used car values and also points you to actual vehicles listed for sale.
Understanding Trim Levels
Trim levels, sometimes called grades, offer different versions of the same model with different features and equipment. For models with several trim choices, automakers usually offer as many as four versions. Sometimes they offer additional choices.
For example, the 2022 Chevrolet Equinox comes in four versions: LS, LT, RS, and Premier. As trim choices increase, so does the cost of the vehicle.
A great way to get to know about trim packages is to read reviews on Autotrader. There you can compare and contrast and see what others think.
Car Features: What to Look for
When searching for the right vehicle that works with your budget and needs, you’ll also want to consider available car features if you want to add those on. Those features, or options, could be anything such as head-up display, keyless entry, blind-spot alerts, heated or cooled seats, premium sound system, and more.
What to look for in features depends on what you need and what your budget allows.
When looking for option packages, try packages that bundle popular options together. Bundling can help save you money.
How to Buy a Car with Cash
Once you’ve selected the car you want to buy, take these steps to complete the deal.
Things to Do
- Negotiate the final price. Don’t settle on paying with cash or even mention it until the final price is negotiated, especially at a dealership. Holding back may net you a better deal at the dealership. From there, use your skills to negotiate an even better deal when you bring cash to the table. See below for more tips on negotiating the price.
- Prepare payment. The safest and most secure option for paying for a car in cash is a cashier’s check. Keep all your transactions safe by never giving out bank or personal information. TIP: If your cash transaction comes in higher than $10,000, budget time to fill out some extra Internal Revenue Service paperwork (Form 8300).
- Don’t forget insurance. Even if you’re paying cash, you still need car insurance. Be prepared ahead of time and pick out your insurance because using
- Pay and pick up the new car. Don’t drive away without a bill of sale, the latest emissions certificate, and the car’s title. Dealers will handle all this for you. With private sellers, it’s your responsibility to get the paperwork done.
- Final paperwork. At a dealer, registration, tags, and taxes get handled prior to completion. However, if you purchase from a private seller, you still need to register your vehicle, pay taxes and get your tags. Check your state’s motor vehicle agency to find out what you need to get the car registered.
Things to Avoid
Check out these things to avoid when going about researching vehicles.
- Focusing just on price. When factoring in the cost of the car, look at more than the bottom line number. After you weigh the differences between cash vs. financing, take into account that no matter how you pay for your car, there’s always gas, maintenance, repair costs, and car insurance to consider. Use this quick tool to figure out Geico car insurance costs. Then compare with other insurers before making a final decision.
- Scams. Watch out for selling scams. Look out for deals that seem too good to be true. If you’re not comfortable, walk away. Check out online reviews of small dealerships before shelling out money for a deposit, let alone a car.
- Fraudulent sellers. If a seller doesn’t own the title, find out why and be willing to walk away from the deal. Use these tips for spotting fraud and get a vehicle history report from a reputable source like AutoCheck or Carfax before buying a car.
- Not researching the value of your current car. If part of your deal involves trading in your car, get the estimated value of your existing vehicle before you walk into any dealership. That helps you know what the dealership likely will pay you for your trade-in. It also helps you when budgeting for a new or used car.
- Not getting a used car checked by a mechanic. For a used car deal with a private seller, be sure to get the car checked out by a mechanic. If a buyer offers a mechanic’s report, do your due diligence by checking out reviews of the shop. You can also double down and get your own assessment.
- Car dealers with no solid reputation. Stick with reputable dealers who treat customers fairly and equitably. You can also check dealer ratings on Autotrader and read other online dealer reviews.
Tips for Negotiating the Price
Use these tips when settling on a price for your vehicle.
- Compare other models. When settling on the price, compare other models. Exploring other options, including older models, helps you stay on budget while getting the extras you want.
- Avoid buying extras. Extended warranties, window etching theft protection of a VIN number, key fob protection, tire nitrogen costs, paint and fabric protection, and windshield, tire, and dent protection. These are just some of the add-ons dealers will try to upsell during the sales process. Many times you don’t need these protections because the car comes with them. You can also ask your car insurance provider what, if anything your policy covers. Sometimes the add-on is only a few dollars.
- Ask for price upfront. Yes, it’s a tactic for dealers to lure buyers into the showroom. But it’s also a safety net for you to see the price first. For example, it gives you a starting point from which to negotiate a car if you pay with cash. If the car gets financed, never give out what car payment range you prefer. By seeing the price first allows you to keep the upper hand during the deal while buying within your budget.
- Consider No-haggle pricing. Many wonder if no-haggle pricing truly comes without the haggling. In a word, yes. But know it’s a fixed price. It makes the process easier but it’s probably not the best price a dealer offers.
When you finally put your foot on the gas and purchase the vehicle, it’s a great feeling. A word of caution, however. Buying a car isn’t like purchasing a refrigerator. It’s more difficult to return a vehicle if something goes wrong. When paying in cash, it’s also more difficult to return to a private seller.
That’s why taking time to research and taking your time helps prevent these situations. Still, things can happen or the car could be a lemon. Read on to know what you can do.
Steps to Take to Return a Vehicle
- Start with the dealer. Reputable dealers, in general, prefer to make good on a sale rather than read bad reviews on social media.
- Consumer affairs. Your state’s consumer affairs division can be another great place to start if you don’t get satisfaction with the dealership.
- Lemon laws. Laws exist in every state in the nation. Know what yours says even before buying the car. Read more about returning a vehicle.
More Car Buying Related Articles:
- How to Buy a Used Car
- Here’s When Not to Buy a Certified Pre-Owned Vehicle
- Financing a Car: When Is Financing Better Than Paying with Cash?
- 3 Car Financing Options for College Grads
Editor’s Note: This article has been updated for accuracy since it was originally published.