How to Buy a Car With Cash

For a digital-first generation, paying for anything with cash might feel foreign. However, buying a car with cash has some financial benefits. In this article, we’ll explore the upside to going the all-cash route for your car purchase and some alternatives to consider.

Buying a car in cash requires a series of steps, some of which can take years. So, it’s critical to understand the end-to-end process, which includes:

• Research Vehicle Options and Prices
  Before you craft a savings strategy, you’ll want to research cars online and develop a savings goal. Consider all aspects of your dream vehicle, including its color, interior, and special features like a sunroof or heated seats. Getting clear on the type of car you want will get you close to the amount you’ll need to save to make your car dream a reality.
  
  
• Start Saving
  Now that you have a clear goal, it’s time to create a more granular savings plan. First, figure out how long until you want to make the purchase. Then, use that timeline and the amount you’ll need to save to create a monthly savings target.
  
  For example, if you want to buy a car for $20,000 two years from now, you’ll need to save $833 monthly. If that seems steep for your budget, try changing your timeline so the monthly amount fits. Simply extending the buying timeframe from two to three years lowers this amount to $555, which may be more feasible.
  
  There are several accounts to choose from to stow away money for a short-term savings goal like buying a car. Since you’ll need the money within the next few years, it may be best to choose a savings account instead of an investment account, which could carry more risk. A high-yield savings account (HYSA) is a great option to consider as it generally pays more interest than a traditional savings account.
  
  

While buying a car with cash can be a good option in some cases, other times obtaining financing could make the most sense. In this section we’ll look at the pros and cons of purchasing a vehicle with cash:

Pros and Cons of Buying a Car With Cash

There are several benefits of buying a car with cash, including:

• Avoidance of Interest Payments and Debt
  The most obvious benefit of paying cash for a vehicle is that you’re paying in full, meaning there’s no interest on a loan or debt to manage. Depending on the price of the car you buy and the interest rates at the time of purchase, shelling out cash could save you hundreds or even thousands of dollars in interest.
  
  
• Outright Ownership
  When you finance a vehicle, the lender owns that vehicle until you’ve completed payments. So, while you’re driving the car around every day, it’s not technically “yours” until you’ve paid in full and received the title. However, when you buy in cash, you own the car and its title from day one. That means even if you fall on hard financial times, you’re not at risk of a lender repossessing your vehicle.
  
  
• No Monthly Payment
  If you have experience building a monthly budget, you know that fewer monthly expenses mean more money in your pocket. Saving a few hundred dollars each month by not having a car payment could make it possible to take another vacation each year or save for another large purchase, like a home.
  
  
• You’ll Stay Within Your Budget
  If you’ve saved $20,000 and that’s all you have to spend in cash, you’ll only consider cars that fit within the budget. However, if you’re willing to finance, you may push the limit and buy something slightly more expensive that fits within what you can afford monthly.

Before you buy a car with cash, consider these potential negative implications.

• Fewer Options
  Since your cash budget is finite and likely smaller than what you might agree to finance, you may have fewer options when it comes to cars. However, if you set up a proper savings plan and research cars at the outset of your car-buying journey, this should be less of a problem.
  
  
• Missing Out on Financing Deals
  Sometimes, dealers offer potential buyers a financing deal where you’ll pay 0% interest for a set period. By paying in cash, you could miss out on these deals. However, you tend to need a good credit score to buy a car with the best financing deals, so if you’re new to building credit or don’t have a strong credit history, paying in cash is a way to avoid the credit check entirely.
  
  
• Fewer Chances for Dealer Incentives
  Once you walk into a dealership, the salespeople want you to make a deal, and they may try to sweeten the pot by offering incentives, like cash rebates, lease deals, or low-rate financing. However, many dealer incentives are tied to financing, meaning you won’t qualify if you pay in cash.
  
  
• Opportunity Cost
  When you buy a car with cash, the value of that money is transferred into the vehicle, and you can no longer use it. If you instead decide to finance the car at a low interest rate and invest the money, it’s possible to earn more as a result.
  
  For example, let’s say you plan to spend $20,000 on a new car, and you can pay in cash or finance it at 3%. If you also have access to a HYSA earning, for example, 4.25%, you could finance the car, put the money into savings, and make 1.25% more over time. Before you commit to a full cash payment, it’s wise to weigh the opportunity cost of the purchase to fully understand how much you stand to gain or lose.

If you want to buy a car but aren’t confident about paying in cash, consider these alternatives instead.

• Financing Through a Bank
  Bank financing is a good option for buyers with good credit since banks and credit unions tend to offer the most affordable interest rates. Before you head to the dealership, consider getting preapproval from your local bank or credit union. Having the guarantee of a competitive interest rate in hand as you shop for cars can be a good negotiation tactic if you decide to finance instead of paying in cash.³
  
  
• Financing Through the Dealership
  Many car dealerships make money by marking up any financing offered in-house. So, there is an incentive to get you into a dealer financing contract instead of having you go through a bank or pay cash. However, keep in mind that sometimes dealers are able to offer incentive deals on their financing that may include 0% interest for a period.⁴
  
  
• Taking Out a Personal Loan
  Another alternative to buying in cash is a personal loan. Unlike a secured car loan, which uses your car as collateral, a personal loan is unsecured, meaning it’s not tied to a physical possession. With an unsecured loan, you’ll need a higher credit score to qualify for better rates, but you may also avoid having to put a down payment on the vehicle.

Whether or not you should buy a car with cash depends on your preferences and unique financial situation. If purchasing a car using cash would deplete your cash reserves, and there is a 0% financing opportunity on the table, you may decide to finance it instead. However, if your credit score is lower and you’re facing a high-interest loan you might not be able to afford, paying with cash might make more sense.