You’ve saved up. For months or years, you’ve put away cash into savings in order to purchase a new car. Maybe you wanted to avoid the financing game at the dealership, or wanted to have the option of buying from a private seller. Either way, you’re ready to buy a new car, and you have the funds to do it.
But should you? There are definitely good reasons to pay in cash for your next car, but there are some cons as well. In this article, we’ll dive into the good, bad, and the ugly of buying your next car with cold, hard cash.
What does it mean to pay cash for a car?
While every mention of paying for a car usually includes a lot of numbers, generally speaking, there are two ways to purchase a new car: either through financing (whether that is through the dealership or at a bank or credit union), or by paying cash. When you cut through all the noise — interest rates, fees, and taxes — you’re either going to be paying the full amount for the car, or you’re going to be getting some sort of loan that you will have to pay off over a longer period of time!
How do you buy a car with cash?
If you’re considering buying with cash — and not getting a car loan — then there are a few things you’ll want to do before it’s time to buy.
1. Know your budget.
If you’re looking to buy a car with cash, you’ll first need to establish some sort of budget in order to guide the process. This means you’ll have to do a bit of research — you’ll want to know the type, make or model of what you’re interested in, and you’ll need to do some price shopping to see what you’ll need in savings in order to afford it. Conversely, if you’ve already saved up and are shopping now, you may want to search by price (Carvana and Cars.com are great options that offer this type of search) and see what is available in your price range.
2. Understand all the costs.
As you are establishing your budget, keep in mind that the sticker price isn’t the only cost you’re likely to incur. You’ll want to make sure you understand what fees must be paid out (and for what reason), and similarly budget for your taxes, title and any purchase or legal fees that may come along with the car. If you’re buying from a private seller, you may want to include some money for an inspection, as well.
3. Sell your old car (if you have one).
If you have a car you are looking to unload, you may want to do that before you purchase — not just to have a little extra cash, but to ensure you won’t also have duplicate insurance costs. Fortunately, the turnaround time for purchasing a car with cash is rather quick and can be done in just a few hours.
Pros to Paying Cash for a Car
Obviously, paying cash for a new car isn’t for everybody, but if you can swing it, there are a few upsides that might make it worth writing that big check. Here are the top three reasons you should pay cash for your new car.
1. You won’t overspend.
When you’re paying cash for a car, your ability to overspend greatly decreases. After all, if you don’t have the money, you don’t have it. This also helps you avoid ending up upside down in a car payment, where you owe more than the car is worth, because you financed too much in the beginning.
2. You’ll save money.
It sounds odd to say that you’ll save money by spending money, but when it comes to buying a car, paying in cash can do just that. If you forgo getting a loan or financing, you’ll also miss out on paying loan fees and interest charges for the duration of the loan term. With the average interest rate for cars being around 5.27% for 60 months, that is money that can add up to big amounts pretty quickly.
3. Your credit rating may improve.
If you have a big purchase in the future and expect that someone will be reviewing your credit soon, it could be beneficial to pay cash for a new car. Oftentimes, when auditors review credit applications — for mortgages or larger loans like a Home Equity loan — not having a car payment can be a point in your favor. In addition, you won’t have the minimal penalty of hard pulling another credit report in order to apply for financing, which can stay on your credit report for up to two years.
Cons to Paying Cash for a Car
If paying cash isn’t in the cards for your next vehicle purchase, don’t worry; there are some solid reasons why paying cash isn’t the best option for everyone.
1. You may be limited on what you can buy.
When you’re paying cash, you have a defined amount that you can spend, which may limit your options in your car purchase. Unless you can smooth-talk your way into getting a dealership to add some upgrades or discount to that more-expensive model, you may have to settle for something a little less expensive in order to pay cash for it.
2. You may miss out on special savings.
Sometimes, dealerships will run special savings, like cash back offers, which are only available if you are applying for their financing options. These savings can be significant, so it’s worth exploring all your options if the car and the dealer you are working with has a special offer in play.
3. You may impact your savings.
If you’ve been saving to buy a car for years and now have the amount you need to head to the car lot, it may mean that you’re about to deplete your savings account. Examine the ramifications of this — is it worth buying something a little less expensive or saving for a little longer to keep some money saved up for an emergency; if it’s not an option you’ll want to have a plan for how to reboot your savings account quickly.
However you decide to buy your next vehicle, we at Spero can help. We’re here to help you get your financial plan in order — whether that means opening a new savings account or exploring your loan options to buy a new car. Call us or come in to one of our convenient branches.
This material is for educational purposes only and is not intended to provide specific advice or recommendations for any individual.