When it comes to purchasing that shiny new car, you might be confused as to whether you should pay cash or finance it. With all the talk about personal finance these days, most people are either on one side of the fence or the other. You have one group of people who pay cash for everything and don’t believe in having any debt at all. Then there is another group of people who finance all kinds of stuff with the intention of paying everything off quickly. There are pros and cons to each approach that we will discuss below.
Perks of using Cash
When you pay cash, you get the perk of not having a monthly car loan payment to deal with. The feeling of not having to scratch out a check each month to pay for your car is a great one. Plus, if you run into any kind of financial, job-related or medical issues, you don’t have the worry of paying your car payment each month. When you pay cash, you also eliminate the need to pay finance charges and interest each month.
Another perk of using cash is that you can sell the car at any time, even if it’s at a loss. Buying a car with cash allows you to have a monthly budget with less of a strain. However, there are some cons to using cash to buy your car.
Obvious Negatives
The first negative for using cash is that you are using up your liquid assets to pay for something that will only go down in value. What else could you use that money for that might earn you a better return on your investment? Secondly, when you use cash you are taking away from emergency funds that might be needed for something else later. This means that you have to be very sure that your emergency fund is in place even when you take out money to purchase a car. You don’t want to put yourself in the position of not having liquid assets when you need them.
No Absolutes Here Folks!
So does this mean that you should always finance a car? Not necessarily. Again, there are pros and cons to both scenarios. Most people like financing simply because it means you’re using someone else’s money to pay for your car. Again, this frees up your cash assets for other important needs. Unlike a lease, financing a car means that you will own it once you have paid all of your monthly payments. There are some great loan deals out there including no money down and a 0% APR.
Bad Credit Might be an Issue
For people with credit problems, getting financing for a car might prove to be difficult. Many people with credit issues find that they have to purchase a car with cash simply for this reason. In addition, having a monthly car payment can put a strain on your budget and cause you financial problems if you lose your job or have other issues that affect your monthly finances. Anytime you are going to take on a monthly debt obligations, you really need to think through it clearly to make sure that makes the most sense for your specific situation.
Measure Twice, Cut Once
Whether you pay cash or finance a car, it’s likely to lose value almost as soon as you drive it off the lot. That’s why it takes careful consideration to make sure that you’re making the right decision for your personal financial situation. Much like a house, purchasing a car is a large financial investment and requires forethought to make sure that you’re not going to put yourself in tricky financial waters.
We just paid cash for our new (to us) used car this past month. While it was a nice big chunk of cash out of our savings account, we had planned ahead for it by saving monthly car payments every month for some time. Because we planned ahead we still have a sizable emergency fund saved, and we can now enjoy our paid for car for the next 7-10 years while saving up for our next one.
My advice is to start out by buying a cheaper but still somewhat reliable car and pay cash. Drive it as long as you can while still saving up car payments every month. Then when you have enough saved you can upgrade that car – and wash, rinse repeat. It’s worked well for us!
Peter recently posted..You Vs. Debt Video Course And Accountability Program Can Help You To Get Out Of Debt
Man, Peter, you think just like I do! I’m a firm believer in paying cash for most things (minus a mortgage). That’s what I did just recently. i drove an extremely reliable Geo Prizm that I purchased for $1,000 and saved up a large sum to buy my dream car out of college, a 2004 Acura TL. When i drive it around, i get a lot more satisfaction knowing I own it, not a bank.
Right now I’m working at building my emergency fund and saving for my wedding/honeymoon. I don’t know what I would do if i wasn’t a saver. i guess I’d be in mountains of debt!
The one thing you didn’t touch on, with regard to taking on a debt, is risk. Every time you borrow money, you take on risk of some level or another. The risk is that you may, in the future, not be able to make that payment. For some, this can create huge straing. For others, financing a car means that they should treat themselves to a more expensive car than they could buy in cash; thus, risk increases. Making this payment every month takes away from the ability to react to Mr. Murphy as well as limiting cash available to put into savings vehicles or emergency funds. Less risk means less stress. Less risk is a financially responsible position in which to place your family, should the unthinkable happen.
Buck the trend, buy a vehicle for which you can afford to pay cash.
GW recently posted..The Left Hates Police…
That’s right GW, buck that trend! I’m so with you on that. Unfortunately, the average American is conditioned to need to compete with their neighbors with everything from their cars to the latest kitchen gadget. My solution to buck the trend has been to get rid of cable and focus my time on building side businesses.
An important note to point out is that you should never put yourself in risk where you have little emergency savings. If that meant taking out a loan to ensure cash flow, then financing would make sense. There are no absolutes, but all good advice here.
“taking out a loan to ensure cash flow…”??? That creates more risk, if cash flow is an issue. Better to buy a $500 beater, drive it for six months until your cash position improves, and then buy up.
GW recently posted..The Left Hates Police…
There is very little risk at 3% interest rates! The problem with buying beaters is that they are not reliable. It’s a better route to go with a nicer car, take out the 3% loan, pay it off quickly all the while protecting your emergency funds. now, if interest rates were higher, my opinion on this would change. IF you can, yes pay in cash. However, a 3% loan is almost free money.
That’s what everybody said about the housing market. “Rates are low and values are going up so there is virtually no risk.” Now we are talking about smaller numbers but with depreciating assets but there is still a big risk.
I would take a paid for beater over a car payment any day. The last thing I need when I lose my job is for someone to repo my car. Now I have no car and no job.
You say: The first negative for using cash is that you are using up your liquid assets to pay for something that will only go down in value
Therefore you think it is smarter to finance something that goes down in value? I think not. If something is going down in value then you want to limit your damages which means you pay as little as possible which includes the finance charges.
It’s smarter if it makes a dent to your cash savings. For example, it was smarter for me to take out a loan for my dream car and pay less for the down payment. Could I have paid cash up front? Well, yes. But that would have sucked out all of my emergency savings. It’s critical to avoid emergency fund depletion! and with financing rates as low as 3%, you can’t go wrong with getting a loan instead of paying cash! Credit is so cheap right now, it’s unbelievable.
Why would you use your emergency fund to buy a car? You wouldn’t/shouldn’t. If you have to dip into your emergency fund to buy that car, you’re buying too much car and you can’t afford it. Above you imply that you paid cash for your Acura, but here you are intimating that you took out a loan.
As Chris said, you decry paying cash for a depleting asset (car), but you suggest paying for money to buy that depleting asset is a good idea?
“Credit is cheap?” Cash is cheaper, baby.
GW recently posted..The Left Hates Police…
My point is that you should never dip into emergency fund savings. Thus, taking out a loan is a god idea. Take me for example. I graduated college with 10k in cash. My dream car was a $15,000 Acura TL. With rental damage deposits and moving expenses to come with moving to another state, it made sense to take out a 4% car loan. I ended up paying 5k as a down payment and taking out 10k in a loan. This way, I protected my 5k emergency fund I have at all times. Then I ended up paying that loan off in less than a year. It helped my cash flow during my move and was the smartest way to go about it. Cheap credit helps in these unique situations
Taking on debt, especially employed in our industry, is not a good idea.
Your philosophy of using debt becomes an increasingly more difficult equation to solve, risk-wise, when you have a house, several cars (paid for, or not), several children, etc. It may work at 20 and zero cares, but your philosophy sets up a practice that can, and has, created loads of stress, strain, pain, and frustration for many, many people as they have moved from childhood to adulthood.
GW recently posted..The Left Hates Police…
@Jon the Saver
If paying cash for a car empties out your emergency fund then you couldn’t afford the car. You had the money, but couldn’t afford the risk of not having an E-Fund.
I happen to disagree because of my situation at the time. i had a career lined up and had to get a car pronto to travel 1800 miles for my new job. Cheap credit at 4% was amazing. I ended up paying the car off 4 years early and I’m proud of my story. Again, it comes down to credit interest rates and personal situations. Also, I had a solid career ready to start and knew I’d pay off the loan within that first year. I think I ended up paying a measly couple hundred bucks in total interest. Emphasis on CHEAP credit!
You’re missing the point. Your story only ended well because everything went your way. If ‘risk’ would have reared it’s ugly head and you lost that job (for whatever reason), got sick, or something crazy like that then you would be singing a different tune.
You took a unnecessary risk, it worked out for you and am glad for that but it doesn’t mean it was a smart move.
My question deals with logistics of paying cash for a car….how do I pay? with a certified check?
If I am buying out of town and have a certain amount I’m willing to spend…..and I work out a deal..do I go back to my local bank …get the money …then return to the car dealer? Also, in negotiating with the dealer, should I come forward with information about how I am purchasing the vehicle?
@GW- You make some very valid points. It’s important to point out that this was the best method for my situation at the time. Good luck driving a beater 1800 miles over CA mountains. If you have a house and kids, it’s another story. But it worked out great.
As for risk, I see very little risk with a 3 or 4% auto loan.
@ Chris- You need to be careful to write off someone else’s experience. You also forget that there are things such as multiple streams of income and unemployment benefits to pay for a car loan. I was well aware of the risk and made certain decisions to protect myself if I did lose my first job, however unlikely it may have been.
In my opinion, car loans are some of the least risky forms of credit right now especially with rates so low. I’ve even seen 0% loans for new cars! Also, by your own advice, you wouldn’t buy a house and take on a mortgage because of the “risk.” I mean, a mortgage of $2,000 is much riskier than a $200/month car payment…
You should think outside of the “cash only bubble.” Not all debt is bad. For me it was great, especially paying the 5 year loan off in less than a year!
@Jon the Saver
You’re right. By my own advice I would not buy a house with debt. I’m in a mortgage now but next time we move, if we can’t pay cash for the house then we are going to rent. So, I’m not talking out of both sides of my mouth, I really do hate debt that bad.
I also disagree with your statement that ‘Not all debt is bad’. I’m a Christian and the Bible clearly teaches that debt is bad. I’m not saying everyone has to agree with me/the Bible, but that doesn’t change the truth that the Bible teaches.
You’re taking it a little far with that stance don’t you think? yes, the bible says that debt is unwise, but it does not say that it’s wrong. To say that it’s wrong or sinful is taking the verses out of context.
Debt can be used for many good things. Take companies and small businesses for example. If there wasn’t cheap credit, you’d see far fewer companies running today.
Treating debt as evil is too far in my book. I’ve seen credit help lots of people in many different situations. Should you be governed by debt? Of course not! That’s why i choose to live a debt free life now and will for the inevitable future. However, not all debt is bad, and car payments with cheap credit is just one of those examples.
Thanks for your comments Chris, they’ve provided a very unique view on this hot topic! It’s always good to hear a different opinion on topics I write about!
No, I don’t think I’m taking it too far. If the Bible says something is unwise, I don’t want anything to with it. I will choose Biblical (God’s) wisdom over man’s wisdom every time.
I never said it was sinful but we are to be wise and follow the instructions in the Bible. To say that is wrong isn’t taking it out of context. It says we are ‘slaves to the lender’ and’ we can only serve one master’. Why would I want to, or advise people to put them selves in bondage when it will create a conflict between them and God?
Any amount of debt you have govern’s you. Want proof? Just take a few months off from paying them and see who is in control.
The Bible doesn’t have anything positive to say about debt, so why would you think it would be a good idea? (assuming you believe the Bible, I don’t know you)
Yes, but you have to take a holistic approach to what the bible says and not get bogged down on black/white topics. Debt in the context of the days in the Bible were different than the types of debts used today.
For example, say you got $50,000 cash laying around and want to get a car at the same time. Maybe interest rates are around 2%. One option would be to pay the cash for the car. Another option would be to take out a $50,000 loan at the 3% interest rate and invest your $50,000 cash in the stock market and get an average return of 10% or something.
This is where common sense and real Biblical wisdom comes in. In this situation, the WISE thing to do is take on the debt and increase your returns by investing the cash instead of paying for a depreciating asset. Does that make sense? This is yet another great example of how you can utilize credit to your advantage.
And yes, I believe that the Bible is the inspired word of God and believe in the literal translation. I’ve talked to other people with your opinion, and it is a dangerous road to travel because you are ruling out very WISE choices that the Bible does not cover. I hope I proved my point that not ALL debt is bad!
I’ll leave you with this word of wisdom: “Don’t work AGAINST the system, work WITHIN the system to your advantage.”
I would love a new car, but I hate payments even more.My cars are old (16 & 14 years old) and still in good condition. If I am going to replace them it will be soon though because I absolutely refuse to have payments during retirements.
krantcents recently posted..Am I Training for a Race?
Haha, good way to go KrantCents! Avoiding those car payments if you can is always the best case situation, nice work.
It all depends on your financing situation and your needs at the time, but paying cash is always the best if you can do it. One strategy is that even if you have a working car now, you can set aside a monthly car payment amount in a savings account so that if and when you need to buy a new car you either have a very large down payment or can purchase the car out right without financing. You can earn interest instead of paying it.
Miss T @ Prairie EcoThrifter recently posted..My ‘Free’ Kitten Cost Us Over $9000
Yes, cash is always the better way to go, but having the credit handy is always nice too! I like your strategy Miss T, that is very smart. I might implement that for my car purchase 10 year from now!
I paid for my used car in cash (about $10,500) and I’m so glad I did. I’m 24 and I simply don’t believe in paying for things with credit (unless you are paying your bill in full each month). I did the same thing with my fiancee’s engagement ring (cost more than the car!), and the only time I envision not paying in cash is my future house, whenever that may happen.
I am not a rich kid who lives on my parents money. I have about $9,000 of my $25,000 in student loan debt remaining, and all the money I have saved has come as a result of working the past 2 years as well as side projects I’ve invested a lot of time in.
Being smart when you are young saves you a ton of money, by living with roommates for two years after college, I saved around $18,000 vs. living alone. Quite a chunk of savings that went towards some of the things I value much more.
Daniel recently posted..How to Earn Superior Returns with Lending Club
Very good advice Daniel! Thanks for the comment. I really like your story of paying down your college debt as soon as possible, truly an inspiration to others.
Um…I paid it off quickly? You’re right, I paid off the high interest debt (7.5%) but the remaining $9,000 at 3.5% is being paid off really slowly because I think I can beat that investing (and I’m about to marry a girl who has some high interest student loan debt that I’ll be helping to pay off).
Daniel recently posted..How to Earn Superior Returns with Lending Club
Yah, the remaining at 3.5% is nothing to sweat over. Better to put your money to work in the markets, especially right now. Did you see the 400 point drop today? Buy buy buy!
Nice points on both sides. I currently paid off my car and never realized how great no monthly payments would be. When I was younger, I leased a car and never realized how much of my money was being burned away. I feel a future post coming up. Thanks!
Buck Inspire recently posted..Tangier Korean BBQ Of Tokyo
I prefer to pay cash for a car then I’m only worried about insurance and maintenance. It leads to paying less in the long run, in my opinion.
Hey Jerry! Yah, paying cash is great, but investing your money while taking out a 3% loan will give you a much better return on investment. We live in times of cheap credit, now is the time to utilize it and use it to our advantage. Then again, if you just have tons of cash laying around, then yes, paying cash is the way to go.
Buy vs. Lease is always a great debate. We’ve outlined how to think about with respect to clean energy, which unlike a car, will actually save you money after you’ve made your decision. Check out: http://www.energysage.com/blog/lease-or-borrow-finance-your-solar-power-system