Should I Pay Cash for a Car or Finance It?

With the price of a new car running well into the five digits, most buyers will need to take out a loan to buy a car. But if you are in a position to pay cash, you can find a number of advantages by avoiding the financing headaches and high interest rates. Even so, you should consider both the pros and cons of paying cash for your next car.

Deal Negotiation

You may be able to negotiate a better deal with the car salesman if you can buy with cash. This is not always the case; but if you have the cash on hand to buy the car, mention it to the salesperson. A cash sale can be attractive to the dealer. It's a good idea to negotiate the price of the car first, letting the dealer assume that you will be financing. After the price is set, ask the dealer if an additional discount is available for cash purchases.

Interest Rate

If you can get a low-interest rate on a new car loan, it probably makes more sense to finance it than to buy the car for cash. This is particularly true if you can earn a higher interest rate on your savings than what you are paying for the car loan. On the other hand, if the interest rates you find are significantly higher than what you are earning on your savings, you will get a better return on your money by purchasing the car for cash and avoiding those high interest charges.

Emergency Fund

If it takes every last penny of your savings to buy the car for cash, it is probably better to take out a loan and keep that money in the bank. Experts recommend that all workers have an emergency fund containing at least three to six months' worth of living expenses, and raiding your emergency fund to finance the purchase of a new car could leave you without the money you need if you lose your job or face another financial setback.

Less Risk

If you pay cash for your car, you do not have to worry about becoming "upside down" on the loan. That can happen when you owe more on the car than its current value, and it is a significant risk. Since cars depreciate rapidly, the risk of becoming upside down on a car loan is high. That can pose a problem when you go to trade the car in or if the car is totaled in an accident. If you own the car outright, you do not face this financial risk.