Should I Buy a New or Used Car With Cash?
When deciding whether to buy a car with cash or finance it with an auto loan, you need to weigh your current financial situation with your future goals. An inexpensive used car may not drain much of your emergency fund reserves, but it still may make more financial sense to pay cash for a portion of the sale price and invest the rest. Financing the entire amount can also be an option, especially if you can secure a low APR.
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Should you buy a car with cash?
Most buyers don’t, when it comes to new cars: Experian’s State of the Automotive Finance Market report from 2021 reported that 81.2% of new passenger vehicles are financed, while buyers only finance 34.5% of used vehicle purchases. According to Kelley Blue Book, the average price of a new car was about $46,000 in February, which is more than many people can afford to pay in cash. The average annual percentage rate (APR) on auto loans is relatively low, especially for buyers with good credit, making financing an attractive option. Some manufacturers even offer cash-back incentives and 0% deals for buyers who finance their new car purchase.
If you choose to buy a car with cash, however, you get the peace of mind that comes with owning your car outright and not having a monthly payment. Your total cost to own is lower because you don’t also have to pay interest. Despite the perks that can sometimes come with financing, buying a car with cash can make sense if you have the money to spare or if you don’t qualify for a low APR.
The best rates generally go to those with the best credit, so do the math using an online loan calculator to see what works best for your situation. You could fill out a single form at LendingTree and receive up to five auto loan offers from lenders, depending on your creditworthiness.
Pros and cons of buying a car with cash
If you are considering buying a car with cash, here are a few of the pros and cons of using cash to buy a car:
| Pros | Cons |
|---|---|
No interest payments | Takes time to save |
Helps you stick to your budget | Risk of depleting your savings |
No monthly payments | Doesn’t build credit |
No risk of an upside-down loan | Fewer dealer incentives |
Pros
No interest payments. When you pay cash for your car, you won’t have to make any interest payments. This lets you use that money for other expenses or investments, and reduces your total cost of ownership.
Helps you stick to your budget. When you buy a car with cash, you’re limited by the money you have on hand to make your purchase. It can be easy to be lured in by the newest model or latest bells and whistles, leading to overspending, but when you pay cash, you’re forced to stick to your budget and make thoughtful financial choices.
No monthly payments. If you pay cash for a car, you won’t have any monthly loan payments. Not having a monthly car payment can be very satisfying if you’re trying to stay debt-free, and paying cash frees up your income for other purposes.
No risk of an upside-down loan. One of the biggest risks of getting a car loan is that your car’s value may depreciate faster than you can pay down your loan. Owing more than the car is worth is called being upside down on your loan. When you don’t have a car loan, you have no risk of being upside down.
Cons
Takes time to save. One of the biggest drawbacks to buying a car with cash is that it takes a lot of time to save up enough money. With rising auto prices, it’s no small feat to save enough money to pay for a car in full upfront.
Risk of depleting your savings. If buying a car would deplete your entire savings, you could be left ill-prepared for an emergency. Unless you’ll have a financial buffer left over, it may make more sense to use part of your cash for a sizable down payment and finance the rest.
Doesn’t build credit. Paying for a car with cash won’t help build your credit because the payment won’t be reported to the credit bureaus. If you qualify for competitive rates and are certain that you will be able to make your loan payments on time, taking an auto loan can build your credit history and potentially improve your credit score.
Fewer dealer incentives. Dealers make a good portion of their profit on financing their vehicles, so they are less motivated to offer incentives to cash buyers. If you’re paying cash for the car, you might not be able to get the best offers from the dealer.
How to buy a car with cash
Buying a car with cash is similar to financing one, but there are a few key differences to take note of:
- Save your money. Set a budget for the type of car you want to buy and start saving your money. A sinking fund, where you save a set amount of money each month in a separate account, can be a great way to allocate money toward buying a new car. Include savings as a line item in your monthly budget to help you reach your goals.
- Find the vehicle you want. Consider the type of car you want, and then research makes and models to find the car that best fits your needs. When you’ve narrowed your search, be sure to take a couple for a test drive before settling on a final choice.
- Get the car inspected by a mechanic. The next step would be to get the car inspected by a reliable mechanic that you trust. This is most important when you are buying a used car from a private party, but it’s a good idea even when purchasing from a dealership.
- Negotiate the final, out-the-door price. Out-the-door pricing includes all fees, such as taxes and registration, as well as any rebates or other incentives. It’s best to negotiate the final price before mentioning that you’re planning on paying with cash to increase your odds of getting a good deal. Negotiation can be stressful for some car buyers, but understanding the car’s value will help ensure that you get the best deal.
- Settle on means of payment. The safest option for both buyer and seller is a cashier’s check, which you can typically get from your bank or credit union. Many dealers won’t accept actual cash, so once the final sales price is agreed upon, you’ll need to secure a check for the full amount. Some dealers will accept a credit card for a portion of the purchase.
- Complete final paperwork. Once you’ve made your payment and finalized the transaction, it’s time to tend to the final paperwork. Be sure to get the bill of sale and the title before driving away.
Alternatives to buying a car outright with cash
You may find a happy medium with some combination of cash and financing. Financing your car purchase makes the most financial sense if you qualify for an acceptable rate at an acceptable term. A good rule of thumb is to carry debt if your interest rate is below 6%, assuming you invest the cash you would have used to buy a car.
If you make a substantial cash down payment, you can reduce the amount of interest you’ll pay by financing a smaller amount.
Even if you have the full amount in cash, you may want to finance a portion of the payment, and then pay the balance off early to help improve your credit score, especially if you’re trying to improve your debt-to-income (DTI) ratio. Check your loan documents to ensure you can repay the loan early without a prepayment penalty.
Frequently asked questions
Can I buy a car with cash?
Yes, you can buy a new or used car with cash or the equivalent. That could mean using a check from your bank or a credit card rather than a stack of bills. Sellers often prefer a cashier’s check from the bank, rather than a personal check that could have insufficient funds behind it.
Should I use all my cash to pay for a car?
Most financial advisors would recommend that you should not use all of your cash to pay for a car. You’ll want to make sure that you still have a sufficient emergency fund available in case something unexpected arises. If paying in cash would deplete your emergency reserves, it’s worth considering financing a portion of your auto purchase.
Does it help your credit to buy a car with cash?
No, buying a car with cash does not help your credit, since there will be no credit transaction to report to the credit bureaus. If you can qualify for a low APR and are certain you will be able to repay the loan, financing part or all of your car purchase can help build your credit history.
Is it cheaper to buy a car with cash?
Many dealers don’t want to give any sort of discount if you buy a car with cash. Since they make some of their profit by financing the car, they would prefer that you finance through them instead of paying cash. Keep in mind the dealer may still try to sell you an extended warranty and other add-ons even if they won’t make any money from financing. Even without discounts, however, you’ll save money when you buy a car with cash because you won’t be making interest payments. Compare the money you’ll save on interest to the discounts the dealer is offering to help you decide which is the smarter financial move.