Buying a Car with Cash: A Comprehensive Guide

The majority of car buyers typically use auto loans to finance their purchases. However, paying with cash has gained popularity in recent years. According to Experian’s State of the Automotive Finance Market, about 21% of new car buyers paid with cash in the third quarter of 2023, up from approximately 14% in 2021. If you’re considering using cash instead of an auto loan, it’s essential to understand the process and weigh the advantages and disadvantages.

Can You Buy a Car with Cash?

Whether you’re purchasing from a dealership or a private seller, you can choose to pay cash for your vehicle. This option is available for both new and used cars, provided you have enough money to cover the sales price and any additional costs associated with the purchase. Before proceeding, it’s crucial to understand how the process works and how it can impact your financial situation.

Pros and Cons of Buying a Car with Cash

There are both benefits and drawbacks to using cash instead of an auto loan. Understanding both sides of the decision and how they relate to your situation can help you determine whether paying cash is the right choice.

Pros

• No monthly payment or interest: If your budget is tight or you simply don’t want the burden of another monthly payment, using cash can help preserve your monthly cash flow. Even though auto loans typically have relatively low interest rates, using cash can save you thousands of dollars in interest charges over the life of the loan.
• Better chance of staying within your budget: When financing a vehicle, a dealer may try to get you to focus on the monthly payment instead of the sales price. It’s easy to reduce the monthly payment on a more expensive model by extending the loan term. However, when you pay with cash, your budget is set, leaving little room for overspending.
• Outright ownership: When you finance a vehicle, the lender holds the title until you pay off the auto loan. The lender may also impose certain rules, such as requiring you to maintain collision and comprehensive coverage. Paying with cash makes you the sole owner, free from lender-imposed restrictions.

Cons

• Limited selection: Depending on how much cash you have on hand, you may be limited to cheaper used vehicles. This may not be an issue if that’s what you’re looking for, but if you want a newer, more reliable vehicle, you may not be able to afford it.
• Less cash for other needs: Depleting your savings to buy a car could leave you vulnerable in a financial emergency. You also won’t have enough cash for other important financial goals, such as saving for a home down payment.
• You could put your money to better use: Saving up for a car can take a while, making it difficult to work toward other major financial goals. If auto loan interest rates are low, you may get a better return on your money by investing it or paying down high-interest debt. In other words, you may be able to use an auto loan as financial leverage.

How to Pay Cash for a Car

If you’re hoping to buy your next vehicle with cash, it’s best to have some time and flexibility. Here are some steps you can take to make the most of your goal:

Create a Budget and Save

Unless you have substantial savings already, create a budget and determine how much you can save each month toward your vehicle purchase. If you have an idea of which model and year you want, you can set a specific savings goal and calculate how long it will take to achieve it based on your ability to save. Remember to account for add-ons, taxes, and fees. Consider opening a separate savings account to keep these funds distinct from other savings goals and set up automatic transfers to ensure consistent progress.

Find a Car and Negotiate the Price

Once you have enough saved, search local dealerships and classifieds for a model that fits your budget. Visit the dealer or reach out to the seller to take it for a test drive and start the negotiation process. Experts recommend not disclosing that you’re paying with cash until after agreeing on a sales price. Dealers often make money by arranging financing, and knowing upfront that they won’t get that money may make them less inclined to offer a lower sales price. If a dealer tries to steer you into discussing monthly payments, you can say you prefer to focus on the sales price and are happy to discuss financing with the finance manager.

Prepare Your Payment

When working with a private seller, they may accept cash. However, dealerships typically require payment via cashier’s check or wire transfer. Personal checks are usually not an option due to the possibility of bouncing. Ask the seller about their preferred payment method and the total amount owed. If buying from a dealer, this includes the sales price, add-ons, fees, and sales tax. If buying from a private seller, you’ll likely pay any fees and sales tax to your local department of motor vehicles, so you’ll just need the sales price. Visit your local bank branch to request a cashier’s check or initiate a wire transfer. If you have an online-only bank, you can do this step online or over the phone.

Complete the Sale

Provide payment for the vehicle and complete all required paperwork to finalize your purchase and get the keys. Ensure you have insurance set up for the vehicle, as there are minimum requirements for liability coverage in most states, and you may also want other insurance coverages for your new car.

Frequently Asked Questions

What Are the Tax Implications of Buying a Car with Cash?

When you buy a car with cash, you’ll still need to pay sales tax, which varies by state. Be sure to factor this into your budget when planning your purchase.

Does Paying Cash for a Car Impact Your Credit?

Paying cash for a car does not directly impact your credit score, as it doesn’t involve taking on debt. However, it also means you won’t have the opportunity to build credit through timely auto loan payments.

Is Buying a Car with Cash Safe?

Buying a car with cash is generally safe, but it’s essential to take precautions. When dealing with private sellers, meet in a public place and bring a friend or family member. For large cash transactions, consider using a cashier’s check or wire transfer for added security.

The Bottom Line

Paying cash for a car has its upsides, but there are also potential drawbacks to consider. Even if your top priority is to avoid debt, carefully weigh the pros and cons to make a balanced decision for your situation and needs. As part of that process, check your credit score and credit report to get a full picture of your credit health. Then, research and compare current auto loan interest rates to determine if a low-rate loan would be a better fit.

For any mortgage service needs, O1ne Mortgage is here to help. Call us at 213-732-3074 to speak with one of our experienced loan salespersons. We’re committed to providing you with the best service and helping you achieve your financial goals.