When Buying a Car which Is better Buying In Cash or Financing it?
Buying a car in cash
Buying a car by financing
You own the car outright from the first payment
You don't own the car outright until you finish all the monthly payments
No one can take the car back from you
If you have a hard time and don't pay any monthly payment, the lender can take the car back from you
You can sell the car at any time
You cannot sell the car until you pay off the loan
Buying A Car In Cash
Buying a Car in cash can be the best choice if you want to buy a car. And that can be true most of the time because if you do like most people who want the latest and greatest new car, you will most likely incurring expenses which may extend for months or even years to come. Of course, if you are rich enough and lavish and you don't care about throwing your money away on things that in reality cost much less, that's another thing. However, I'm sure that there are rich people who are thrifty and who aren't willing to throw their money away.
Buying a car in cash has several benefits beginning with the peace of mind of paying a lump sum payment that lets you own the car outright without monthly payment and ending with the avoidance of reeling with the complex pricing system that includes a low or high interest or a compounded interest if you finance the car by taking a loan.
Cars are depreciating assets so financing the car will drain your finances. Although there are some circumstances where financing the car by taking a loan might be better, paying for the car in cash is always less hassle.
Let's look at the benefits and the downsides of buying cars in cash:
The Benefits Of Buying A Car In Cash
- By signing a single contract, you own the car outright. Or in other words, you pay a lump sum payment to the dealer or any seller and the car becomes yours.
- Paying in cash means that there are no monthly payments. In contrast to financing, because financing means that you will most likely pay a down payment at first, then you pay monthly payments that may include interest. That interest depends largely upon your credit score.
- Cars are depreciating assets and although classic cars may increase their value over time, most cars do not. Therefore, taking a loan and paying interest for something that is decreasing its value, means that you are losing your money in 2 directions. That makes buying in cash an excellent solution to avoid the consequences and the implications of financing by taking a loan.
- You can save more money, which you would have otherwise paid for paying off the loan and interest. Bear in mind that the facilities that offer the loan prey on our desire of owning the latest and greatest cars so they attractively advertise their loans. Be wary that any interest or at least the difference between the price in cash and the cost of the loan is an increased amount of money that you will incur overtime. Also, the longer the time, the more money you will incur.
- You will get a clear idea about the true value of your car because taking a loan will mask the actual value of the car.
- If you are going to buy the car from a dealer at the dealership and you are not an educated buyer, you will most likely be taken for a ride and the dealer may reel you in his complex pricing system that will make you end up incurring expenses that may extend for years to come. However, buying the car in cash will make you avoid that scenario and will give you more negotiating power.
- If you don't have the cash now, you can wait until you have the required money. Do not rush to finance the car while you can save extra money by deducting a share from your salary or by sacrificing some luxury such as dining out multiple times a week.
- Taking a loan is not a good financial strategy.
- Other loans such as the mortgage for your primary residence or the student loan allow you to deduct the interest payments from your income and then pay the taxes on the reduced amount however auto loans are not tax-deductible.
The Downsides Of Buying A Car In Cash
- Since the new cars are expensive and not everyone can buy them in cash, you should lower your expectations regarding the type, make, or model of the car that you are interested in buying. So don't get fancy, because you will most likely end up buying a used car. The good news is that there are many good and helpful tips online that will help you find a good, reliable, and affordable used car.
- Any money you will use to buy a car in cash is then not available for any other things. Meaning, you may have that money in an investment account or you can use it in any enterprise to earn returns. If that's the case, when you use that money to purchase a car in cash, you will lose that opportunity of earning any potential returns.
- Getting the physical cash on hand might be difficult, especially if you have out of state or online bank account. Therefore, it's highly recommended that you open a local bank account, then transferring the money, but you must do that far in advance.
- If you don't have the required cash and you still want to buy a car in cash, you have to wait until you save that required cash.
- There’s also an opportunity cost of paying in cash. In other words, If you choose to pay in cash, you may lose other opportunities that can make you earn extra money.
When It Makes Sense To Not To Pay In Cash?
- If for any reason you want to buy a more expensive car and you do not have the cash on hand, then financing by taking a loan will be the only solution for you.
- When you find that finance is more suitable because you can use the money in other profitable enterprises or any other purpose.
- If the money you are willing to pay in cash is utilized and you get returns that can cover the monthly payments and the interest that you will incur if you finance the car that you are interested in buying.
If you have the required cash for buying the car, do you buy it in cash or invest that money and take a loan instead?
Some Tips To Help You When Buying A Car in Cash
- Do your research upfront online can save you a large amount of time and money. Look up websites such as edmunds.com and Kelly Blue Book to determine which car can fit your needs. Also, look up websites such as Cars.com, CarsDirect, and Kelly Blue Book to get price quotes that will help you with negotiating.
- Use online tools such as TMV (True Market Value) and TCO (True Cost to Own) on edmunds.com.
- If you made a list of multiple cars, whether they are new or used cars, then narrow down the list until you have many cars that are a good fit with your budget.
- Check the reliability of the cars that you interested in buying with the Consumer Reports to read some reviews on the cars that you are considering.
- Check the safety ratings and crash tests of the cars that you are interested in purchasing with Euro NCAP.
- Check online the cars that you are interested in buying with the National Highway Traffic Safety Administration to see if they have been recalled.
- Kelly Blue Book will give you the private seller and the dealership value. With the dealership, you have more wiggle room for negotiating. The best cars are the certified cars like CPO that still have a warranty, but do not buy until you run the Vehicle History Report by using the VIN (Vehicle Identification Number) of any used car you are interested in buying.
- If the car that you have settled on buying is used, bring along a certified mechanic to check it up internally and externally for you. By doing so, you can avoid the used cars that have been in a major accident or that has undergone major repair work.
- When negotiating, stick to the cars and the price quotes that you have in hand. Do not let the salesperson or the dealer sway you to another choice. If they are tough, walk away and look for your demand somewhere else.
- When you sign the contract or the bill of sale make sure that it includes the date of sale, year, make, model, warranty (If applicable), the VIN, the current odometer readout (If the car is used) and the sale price.
- Make sure that you get a receipt from the seller and that the receipt acknowledges that you have paid in cash. Make sure that the seller finalizes and sign the receipt in front of you.
- The seller must transfer the title to you. Check with the Department of Motor Vehicle in your state to see if the title needs to be notarized.
As you can see, although buying a car in cash can be your best choice when you think of buying a car, there are some circumstances where you find financing is more suitable. After all, it all depends on your situation.
I hope that you found this hub helpful.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.