Is It Better to Make Payments or Pay Cash for a Car?

Most consumers have little choice but to finance the purchase of a new vehicle. However, if you have the cash to spare and your overall financial picture is sound, it is usually better to pay cash. There are some situations where financing a vehicle purchase does offer some valuable benefits, even if you have the cash on hand.

Long-Term Savings

By paying cash for a new car, you avoid the finance charges that can add up over time. Depending on your interest rate, this could easily add up to thousands of dollars over a period of four or five years. You won't have the stress of making that large monthly car payment and the associated fear of falling behind and losing the vehicle. You can also potentially lower your insurance costs, since you won't be forced to carry some of the coverages and deductible amounts that lenders require.

Finding the Cash

Of course, if you're buying a brand new car, you can easily spend $25,000 or more, an amount that can be difficult to obtain without financing. Even if you do have that kind of money, it can take a big bite out of your retirement savings, emergency fund or your kids' college education fund. Consequently, you could be jeopardizing your financial future just so you can own a new car without taking out a loan.

Lost Opportunity

By paying cash for a vehicle, you may miss out on other investment opportunities. Instead of taking your $25,000 and purchasing a new vehicle that will depreciate in value over time, you could purchase an investment instrument like a mutual fund that will offer a return on your money. You could still use a portion of your money to make a down payment on the vehicle and finance the rest and have plenty left for investing.

Negotiating Strength

Paying cash can be a big advantage when negotiating with the dealer. If you let the salesperson know you have the cash and are ready to make a deal, you can often negotiate a lower price than you could by financing. Dealers typically make less money on a cash transaction than they do when your finance the purchase, so the salesperson will likely expedite the transaction so she can move on to the next customer. This means less time and hassle at the dealership for you, as well as a less expensive purchase.