Pay Cash for Your New Car? Better or Not?

Should you pay cash for your new car, if you have the cash available? Is it smart to pay cash instead of financing with a loan or lease? Does it save you money? Can you get better deals with cash?

My dear old mother who is now gone grew up during the Great Depression. She felt that one should always pay cash for anything one purchased, including cars. One should never go into “debt” to buy the things they want or need. Many people still think that way about buying cars. Are they right? Is that still a good philosophy?

Maybe. Maybe not. It depends on the circumstances.

First, let’s dispose of an old myth. Paying cash will not get you a better new-car deal. Here’s why. Dealers do not finance their own loans. If they did, as some did in our grandfathers’ days, they would rather have up-front cash than payments over a long period. However, these days, dealers always get cash, even when they arrange financing for customers with a bank or with their “captive” finance company. The bank or finance company writes them a check as soon as a customer’s financing has been approved. In fact, dealers make more profit on a finance or lease because they receive a bit of a “kickback” payment or “finders fee” that they would not get if the customer pays hard cash. In short, a new-car dealer makes more money on financed deals.

Let’s now get to the heart of this discussion. If you have the cash in the bank or in an investment,  should you use it to buy your next car?

Some people simply don’t like having debt obligations and monthly payments. For those people, most other considerations are immaterial. Therefore, they should pay the cash and be happy.

However, let’s look at those other considerations for those willing to listen.

Overlooking the fact that many people don’t have cash and simply could not buy a car without financing, sinking cash into a rapidly depreciating asset (e.g. automobiles) may not be wise. If you pay $20,000-$40,000 in cash for a car and your financial or job situation turns to the worst, your 2-3 year old car is now only worth 50% of  the money you’ve spent. Half your money is gone. And it might not be quick or easy to get the other half back if you need to sell. But, of course, you can keep your car and make no payments.

On the other hand, if you had financed your car with a loan, and kept your money in the bank, your exposure is only your monthly payments. Even if you can’t make the payments and have to sell the car, you may be able to recover some of your equity or, at worst, use some of your remaining cash to cover a negative equity. Meanwhile your cash in the bank has been available to you all along for emergencies, other purchases, and investments.

With so many car companies now offering 0% APR loans, it makes an even more compelling argument for taking the loan deal. If you take a loan at 0% and leave your cash in the bank even at a measly 1.5%, your money is in a better place.  And it’s more liquid — easier to take out. If you use a loan, you can always decide to pay off the loan early with some of your cash. Using a loan,  you have flexibility and choices that you wouldn’t have if you had paid cash.

Furthermore, paying cash does nothing for your credit history and credit score. If you don’t have a long credit history, taking a car loan and paying it off on schedule will build your credit rating, which might be important to you in the future when you need other loans or a home mortgage.

We’re not suggesting that taking a loan is always better, or that paying cash is always better, but you should look at the entire picture before making your decision. One way will always be better in your particular situation.

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