Paying cash for a new or used car has its advantages and disadvantages. Cash payments can speed up the negotiating process and circumvent costly vehicle financing. Cash also has its disadvantages, including federal tax requirements relating to how much cash you use to pay for a car. Whether you decide to incorporate cash into the purchase of a vehicle depends on your particular financial situation.
Cash on Hand
Using cash to purchase a car can be a smart move as long as the cash you use to buy the vehicle comes from your checking account and not your investment portfolio. Pulling cash out of your investments to buy a car can hurt the long-term growth of your accounts, according to financial information website The Motley Fool. This means you're effectively sacrificing more cash than you're paying for the car because the money you remove from your investments no longer has the opportunity to grow.
Buying a Used Vehicle
It's always a smart idea to use as much cash as possible when purchasing a used vehicle. This is particularly true for older model cars with higher mileage. The last thing you want is to finance a used car, have the vehicle break down and need to pay for repairs while still making payments to your lender. Paying cash for a vehicle can also eliminate any additional auto insurance requirements a lender may have when extending credit to purchase a car. If you own the vehicle outright you can decide if the car needs any additional coverage past your state's minimum standard.
Bad Credit
Paying cash for a vehicle can help you obtain a car you may not otherwise be able to get with bad credit. The credit requirements for new vehicles are typically higher than those for used vehicles. If you have bad credit, financing a new vehicle may be difficult to impossible, depending on the price of the vehicle. Paying cash eliminates the need for a credit check and allows you to pick from vehicles you can afford versus what a dealership may agree to finance.
Cash Payment Declarations
If you pay more than $10,000 in cash for a used or new vehicle, the seller of the vehicle is required to fill out IRS Form 8300 within 15 days of the transaction . This form must be completed whether you pay the $10,000 in one lump sum, in two or more related payments or in related payments over a single 12-month period. The filing of IRS Form 8300 requires your personal information including your full name, current address, social security number and whether the dealership considers the transaction to be suspicious. The IRS may cross-reference this form with your income tax returns to determine if any criminal act, including money laundering, has occurred.
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