When the time comes to buy a new car, you may be wondering whether paying cash is the best option.
Buying a vehicle with cash can certainly mean less of a hassle (and a lot less paperwork)! Plus, you’ll save all that money on interest right? But even if you have the cash in hand, it is still worth considering vehicle financing.
Before you make a decision, let's discuss the positives and negatives of purchasing you next car with cash.
When it comes to buying a car, there are several advantages to paying with cash and avoiding financing.
The biggest upside of buying a car with cash is the money you will save on interest payments. If you are purchasing a $20,000 car with $4,000 down and an available APR of 5% over 48 months, you will ultimately save close to $1,700 in interest. This is a great reason to consider buying a car with cash if you are able.
If you know that you only have $20,000 to spend on a car, you will not be tempted to overspend on trim levels or other add-on features. These added features can add up quickly and, before you even realize, you're over budget.
Let’s use the above example again. You are planning to finance $16,000 of your $20,000 car, but the dealership offers you some upgrades. A better sound system, all weather mats, and blindspot protection are going to up your bill by $3,000. Now you are on the hook for financing $19,000 instead of $16,000. Instead of paying an extra $1700 in interest, you are paying an extra $2000 in interest, plus the extra $3000 in add-ons that weren’t in your budget. It’s easy to see how your budget can get away from you when increasing your financing is simple to do.
Owning your car outright is another major reason to consider paying cash. You will have an asset that you can sell or use as collateral if need be. You also have the option to reduce your insurance coverage, as you will not be bound to a certain protection level. This can save you even more money.
A major risk of auto financing is becoming upside down in your loan, which is when your Loan-to-Value is over 100% – that is, you owe more on your car than the car is worth. Since cars depreciate in value incredibly fast (new cars typically depreciate 25% in their first year), becoming upside down in a car loan is not uncommon. If you're able to pay cash, you won't have to worry about this happening.
If you already feel like you have too many monthly bills to keep track of, buying a car outright will ensure you don't add another bill to the pile. Sometimes having one less thing to worry about can make all the difference!
However, despite these advantages, there are, of course, times when paying for a car in cash will not be the best option for you.
If paying cash for your car will completely destroy your savings, it’s probably not a good idea. Financial experts always recommend keeping an emergency fund to account for unexpected expenses. If something unexpected comes up and you are forced to take out a short term loan or max out your credit card, that can be very harmful to your financial wellbeing. Only pay cash if you are in a good position to do so and it will not wipe out your savings.
A great way to build your credit is to take out a loan and make consistent on time payments. If you pay cash, you won't get any benefit from the purchase on your credit report. Even if you have the cash in hand, it might be better to take out a loan and comfortably make your payments to increase your credit score. This can be beneficial for any long term goals you might have, like buying a house.
While sticking to a strict budget is good because you won’t be able to overspend, the flip side to that benefit is that it limits your options. If you're going to buy a new car, don’t you want it to be exactly what you want? If you finance your vehicle, you may be able to expand your budget to cover the exact make, model and trim level of the car that you want. Plus, you can get any add-ons that you might find particularly useful.
Sometimes dealerships will offer special low financing and cash back or rebate offers when you finance through them. In certain instances, the amount you save by not paying interest may be outweighed by the money you will make by taking advantage of the rebate, or at least even things out. This will typically only happen if you have excellent credit. In this case, do the math and see which option will save you more money.
If interest rates are very low, it sometimes makes sense to take advantage of them. This frees up the cash you do have for other investments or improvements on your house. If you were to take out a personal loan later on to pay for something, it would most likely be at a higher rate. Taking advantage of low APRs is often a good long term plan if you consider your finances altogether in one portfolio.
If increasing your credit score is high on your priority list, then financing your vehicle is probably a good idea for you. And if you already own a car and are looking to bump your credit score? Consider refinancing with Auto Approve. Refinancing can help you save money while also improving your credit over time.
As you can see, the right way to purchase a vehicle will vary greatly from person to person and situation to situation. As always, it’s important to do the math and see what makes sense, as well as take stock of what your priorities are.
Because of the advantages to financing, we tend to think that the best thing to do, if you have the financial flexibility to pay in all cash, is to put down a sizable downpayment to ensure you get a great low rate while also keeping a good chunk of your cash for other investments and emergencies.
And, if the dealer offers you a rate you're unhappy with, you can always refinance your loan with Auto Approve to pay even less in interest, over time, or both.
We work tirelessly to find our customers the best rates out there and secure the best terms for them. Refinancing to a lower APR can save you thousands of dollars, and it takes only a few minutes to get started.