Buying a used car with cash may not always be the best idea. If you’re buying a car with cash you actually miss out on some of the credit building opportunities you get by financing with an auto loan. If you’re buying a used car from a dealership then you’re going to most likely be presented with a few options to choose from: buy the used car in cash, take advantage of in-house financing, or secure third party lender financing.
In many cases, if you’re paying cash, you’ll already have your mind set on using that cash to buy the car. If you’re looking for financing you won’t always know if you’re going to get in-house (dealer supplied) or third party lending through a bank, credit union, or other lending institution so it’s best to find the best interest rate for you.
But wait, what about a private seller? You’re almost always going to be using cash to buy a used car from a private seller. Getting an auto loan from a bank or credit union is much harder than through a dealer.
Should You Pay with Cash if You Can?
The answer is as simple as – do whatever you think is best. This is a common question and many people always promote using cash over credit to get a used car. There are many, many factors that go into the decision to actually buying a used car with cash – the main ones are price of the car and your overall financial situation. If you have all your bills covered, you have spent time to learn good budgeting skills, and are not entirely in need of the money at this time then go for it. You’ll save yourself the monthly payment, plus interest, and often you can use the cash to negotiate a better deal.
However, even though not having that monthly payment can be pretty tempting, there are some drawbacks to paying for a car in cash. One of the biggest negatives to buying a car with cash is that you may not get the newest models shown to you. It also does not allow you to improve your credit at all, so trying to use an auto loan to build credit is out of the picture.
What to Know About Being a Cash Buyer at a Dealership
The dealership is usually not interested in your cash, they want you to finance. That’s where they make the most money. Their goal is to not get you to pay cash as much as possible. This is highly unlike private sellers who want to be paid with cash in hand to not stall the sale. The dealers will make money off of the loan you take out with the interest charged. For example, you could get approved for a loan at 3.5 percent interest from a lender and the dealer will hike it up to 4.5 percent and pocket that 1 percent in interest charges. This is known as a “dealer reserve” and is common practice in every state.
By you showing up with cash you’re limiting the profit a dealer can make on a car and instead they usually make less, and sometimes even have a loss, on the car. A lot of dealers will use the extras like warranties or service plans to help give you an incentive to finance with them and then when they give you a “discount” on the price they really are just giving away those for free – at no cost to the dealership and all the cost to you because they up-charge everything.
It’s true, a good dealership won’t care if you are there to pay in cash or not. One of the easiest ways to spot a shady dealership is with financing and if they try to shove all those “extras” down your throat. They typically are the ones that will go the extra mile for you without trying to take your wallet. They don’t want to spend hours on a deal just to have it fall apart so being a cash buyer at a good dealership may be a blessing in disguise for them.
So, Is Buying A Car with Cash a Good Idea or Not?
Ultimately, whether you buy a car with cash, or finance it with an auto loan is up to you. Your financial situation, spending habits, and goals all come into play here. If you’re focused on building credit as a teenager, or don’t have a lot of cash on hand, the auto loan is the way to go. If you can spare the cash and aren’t concerned with credit, consider being a cash buyer. Just beware of shady dealership practices and think things through before making your purchase.