When Should I Pay Cash for a Car?

“How would I pay for my car?” is the first question that comes to mind when planning to buy a car. When the idea of getting a car forms, some people start saving money for buying the car with cash sometime in the future. And some people look for the best offers of car loans from different sources. As more and more people are leaning towards buying cars with outside financing, the question arises, “When should I pay cash for a car?”

Both these choices are valid, each being the best option for a different buyer. We buy cars in order to get better transport in our daily life. So how we manage the money to buy the car should be the way we feel to be the most flexible for us. In the growing era of technology, car payment is a tough part of vehicle purchase as the price is always on the rise. For this reason, you must understand when to pay in cash or when to manage outside financing when buying a car.

Two Ways of Buying a Car

Like any transaction, buying a car requires an exchange of money. As cars are not a small investment in any way, the decision on payment type is also a difficult one. There are two basic ways you can pay for the car you want to buy:

Paying Cash

When you buy a car with the money you have saved up and pay in cash or with your debit card, you can become the owner of the car outright. You can just choose the car you want to buy and fill up the documents to gain ownership of the car, and instantly the car title is transferred to your name.

Financing from a Financial Institution

On the other hand, if you do not want to pay for the car with your savings, you can arrange financing with a car loan. These loans can be paid in monthly loan payments. A lot of the dealers also allow you to make a down payment, and you can pay the rest to them in installments over a time period of 24 to 84 months with a certain interest rate.

Market Statistics

Most car buyers are not willing to take out a huge chunk of their savings to buy a car. No matter whether you buy a new or used car, the amount is too large for most people to pay at once. But 2021 market reports show that 81.2% of new vehicles are financed with loans, whereas buyers tend to finance only 34.5% of used car transactions.

The average price for new cars is too far away from most people’s paychecks. Also, the annual percentage rate or APR for car loans is quite low on average, making the decision to finance the car easy for the buyers. Some dealers even offer trade-in opportunities where customers can exchange their old car for a new one by paying the extra amount required in cash or in monthly installments.

Advantages of Paying Cash for Your Car

If you can afford it, paying cash money for your car is always commendable. It gives you a chance to make your choice of vehicles based on your budget and not based on offers, financing opportunities, or drawbacks. Among all the advantages, not having to pay the extra amount of money as interest payment is definitely the best.

No Monthly Payment

When you buy a car with a car loan, you are bound to pay the amount over a certain time limit with multiple monthly payments. A monthly payment can be a hassle to pay off, as there is no chance of not paying that. The monthly car payment also has the potential to create a problem with the purchase price of daily necessities. But with cash payment, you do not have to worry about any of this.

No Interest Rate Tension

Interest payments are the biggest problem in financing your car. Even with the low APR of auto loan payments, this can increase the total cost of the car drastically high. Just the interest rate has the potential of totaling half of the original cost of the car, making the vehicle price increase by 50%. Cash buyer has the chance to avoid this by buying the car with cash, having no worries about interest payments.

Prevents Upside Down Loan Risk

An upside-down loan is a situation where the value of the vehicle is less than the money owed to the debtor. This happens when the car depreciates at a rate so high that the loan payments are not at par with the market value of the car at any given moment. If you do not receive an auto loan, you have nothing to worry about in this scenario.

Reduces Overspending

When we try to buy something with financing, we do not really have a limit to our choices. A lot of people apply for loans to buy a new car at a higher price than they can afford, thinking they will pay off the amount gradually anyway. But the more expensive choice results in higher accumulated interest expenses. If you buy a car with cash, you will only choose something within your capability, reducing any chances of overspending.

Personal Satisfaction

When you buy a car with cash, you become the owner of that car outright. This is such a boon for anyone because paying off a car loan over a long period of time makes the process very tedious, as well as increases the total cost of the vehicle. But buying in cash gives the cash buyer a personal satisfaction that no money can buy.

Disadvantages of Paying Cash

Like all things, paying in cash has some problems as well as perks. A buyer should know both sides of this to make the best decision for them. Surprisingly, the pros and cons of paying with cash when buying a car are all over the spectrum.

• No added credit is gained if the buyer pays in cash. When someone has a good credit history and makes loan payments accordingly and on time, they get credit from the bank or credit union, which helps them gain more loans easily. But cash buyers do not enjoy that luxury.
• Requires a lot of time to save money to buy a car. If you want to buy a new car, it will take years of regular saving habits to save up enough money.
• Dealers offer fewer incentives when buying with cash. Dealers always try to push for financing when selling a car. They want to include the interest payments in their revenue. So they tend not to offer extra incentives to cash buyers.
• Puts a strain on the savings account. Savings should be kept for emergencies. But using up years of savings from one’s monthly budget to buy a car that can easily be financed is not always practical.

When Should You Pay Cash?

Because of the offers of incentives and stress-free initial transactions, many people want to pay for their cars through financing. Buying a new car completely with cash is almost impossible for a majority of customers. But in some scenarios, paying cash for a car is preferable to taking out a loan.

• When buying a used car, the lower price range makes it easy for cash buying. Most of the buyers in the used car market buy a car with cash, as used cars are not always worth the extra interest expense.
• If enough money is already saved, someone can easily pay for the car with cash without straining their monthly income.
• When there is no risk of depleting savings put aside for emergencies, cash buying is the better option than financing. You can create a savings account just for buying a car that will mature in a couple of years.
• When buying a car is not an urgent issue, and you can be patient in building up the amount in your savings account, buying the car in cash is the best choice.

Conclusion

Spending money on a car is definitely a huge decision. So as much time we spend choosing the perfect car to buy, we need to spend just as much time figuring out how to pay for the car. Nowadays, the offers for financing seem too tempting to new buyers. This can create situations where people take drastic decisions. But car loans come with some major baggage that the buyer has to carry for a long time.

If you have the means and want to buy a car with cash money, go for it. But there are times when financing the car is the smartest choice. Both choices have their best aspects, as well as their side effects. Research the best choice for you thoroughly and then make a decision. Instead of listening to dealers and salespeople, consult with experts and read more about all the aspects you need to remember before buying a car.