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Should I Buy a New or Used Car With Cash?

Buying a new or used car with cash is not only possible, it could save you thousands of dollars in interest charges. The best answer when deciding between cash or an auto loan depends on your financial situation. An inexpensive used car may not drain much of your reserves, but it may make more economic sense to pay cash for a portion of the sale price and invest the rest, or finance the entire amount, especially if interest rates are good.

Should you pay cash for a car?

Most buyers don’t: 85.4% of new passenger vehicles are financed or leased, and 55.5% of used vehicles are financed. One reason is that the average new car price keeps going up, to about $39,000, more than many people can afford to pay in cash. Plus, interest rates are relatively low right now. Average rates range from about 4% for those buying a new car with excellent credit to 20% for used car buyers with the worst credit rating. Some manufacturers offer the option of a cashback incentive, a low APR such as 0.9% or even 0% deals.

The best rates generally go to those with the best credit, however, 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.

No matter what rate you may receive, if you want the peace of mind that comes with owning your car outright and not having a monthly payment, pay cash, said car broker Tom McParland.

Paying cash for a car may make sense when:

  • You want to avoid debt.
  • You can pay cash without cutting into your emergency fund savings.
  • You don’t qualify for low APRs. “Those with a low or no credit rating may not be able to qualify for lower rates and should consider paying cash,” said financial advisor Howard R. Pressman.
  • You’re able to negotiate a price within your cash budget through dealer incentives or discounts. In December, the average dealer discount was 7% off the MSRP.
  • You have a high-value trade-in, and you have cash for the balance.
  • You’re buying an inexpensive used car.

Paying cash for a car may not make sense when:

  • You’re buying a new car at or above the average price.
  • You qualify for a low APR.
  • You won’t have enough cash savings left for an emergency fund.

How to pay cash for a car

Cash or financing, here are the basic steps to selecting and paying for a vehicle:

  1. Set a budget. Establish how much car you can afford.
  2. Research the vehicle you want. You could check out our guide to the best cars, by vehicle type.
  3. Shop for the best deal on the vehicle.
  4. Negotiate pricing for the car without committing to how you’ll pay for it. That way, you can separate the cost of the vehicle from the cost of financing.
  5. Ask for the out-the-door price. Out-the-door pricing includes all fees such as taxes and registration, as well as any rebates or other incentives. “You always want to negotiate the best out-the-door pricing, regardless of how you’re paying for it,” said McParland. He advised to negotiate and emphasized getting an itemized list — though he noted “that’s not always as easy to obtain as you want it to be.”
  6. Settle on means of payment. Now is the time to mention a full cash payment or a large down payment. If you don’t want to walk around with thousands of dollars in cash in your pocket or purse, some form of a check will be required.

You could use a personal check drawn from the balance in your account. However, many dealers will prefer a cashier’s check or certified check from your bank or credit union.

Cashier’s check vs. certified check. Both types of check guarantee funds are available to the recipient. For a cashier’s check, you pay the bank or credit union up front, and it guarantees the check will clear. The recipient can have immediate access to the money. By comparison, a certified check ensures you have the amount in your personal checking account, and the money stays in your account until the check is cashed.

Your bank or credit union may offer a preapproval service, such as the Auto Power Program from North Carolina’s State Employees’ Credit Union. Members can get preapproved for a loan up to a specific amount, then fill out SECU’s blank check when they finalize the price at the dealership.

Use your credit card. Financial adviser Barbara M. O’Neil used a credit card to put $5,000 toward a recent car purchase with the remainder paid by personal check: “The dealer did not require a certified or cashier’s check, and I negotiated the price before telling the dealer that no financing was involved.” Dealers may accept credit cards for at least some of a car purchase, but may not accept them for the entire amount because of the bank fees involved. Some card companies like American Express have a network of dealers that will accept the credit card and provide other benefits for using your credit card. Manufacturers like General Motors may even have their own credit cards where cardholders earn points toward the purchase of a new GM vehicle.

Alternatives to buying a car outright with cash

You may find a happy medium with some combination of cash and financing. Given where interest rates are right now, financing a car purchase likely 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 ratio. Check your loan documents or ask your finance company if you can prepay the loan without a penalty.

FAQs

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 will prefer a cashier’s check from the bank, rather than a personal check that could have insufficient funds behind it. For less expensive used cars from private sellers, say $10,000 or under, actual cash may be preferred — but always take safety precautions when meeting a private seller when paying a lot of cash.

Is it better to pay cash for a car?

From a dealer, not really. But if you want to avoid debt, then paying cash makes sense, especially if it will keep you from overspending or you’re worried about becoming upside down in an auto loan.

Are there discounts for paying cash for a car?

Generally, dealers don’t offer discounts for paying with cash because they also make money from the financing; an all-cash deal cuts into their overall profits. “It’s a huge common misconception that cash gives you leverage when in fact, it’s probably the opposite,” McParland said.

For dealers, financing and other products such as extended warranties are part of their revenue as much as profits from the car. An all-cash deal may not be attractive to the dealer. 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.

“If a customer walks through the door and says, ‘I have cash,’ the dealer knows that the door to the profit stream from the finance office is closed. So the motivation to wheel and deal on the car itself may be diminished,” McParland said.

In a private sale, you may be able to negotiate a lower price for an immediate cash payment.

Should I use all my cash to pay for a car?

The financial advisers we talked to agree that you shouldn’t use all of your cash for a car. They advised that you keep some cash set aside for an emergency fund.

 

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