Buying a Car With Cash: Pros and Cons

Are you ready to buy a car? Purchasing a new vehicle is a significant life achievement. You’ll be happy driving off the lot with your new machine. Unfortunately, getting a car isn’t as easy as “The Price Is Right” makes it seem. You have to go through the process of buying the vehicle. What about buying a car with cash? This guide will outline the pros and cons of this decision.

Pro: Saving Money on Interest

The idea of saving money by spending money sounds odd, but buying a car with cash will save you money because you won’t have to pay interest. The lender will negotiate a deal with you when you purchase a vehicle and include an interest rate. Unless your credit is impeccable, you’ll likely pay around 5% interest for your loan. However, paying with cash means no interest because you’re paying in full on the spot. 

Pro: Avoiding Monthly Payments

Another advantage of buying a car with cash is avoiding monthly payments. Financing a vehicle can mean making monthly payments for multiple years, depending on the price and monthly payment. Instead of spending money on a monthly car payment, you could allocate the funds toward other ventures like retirement or investment opportunities.  

Pro: Owning the Car Outright

Buying a car with cash leaves no doubt about who owns the car. Your new vehicle will become an asset on your property. You can use the car as collateral if you run into such a situation. You’ll feel better living a life with no debt. If you can avoid debt, paying with cash could be a good idea.

Auto debt has become a burden in the United States. The balance of car loans for Americans has increased significantly since 2010. In the first quarter of 2010, Americans totaled about $700 billion in car loan balances. That number has doubled, amounting to over $1.5 trillion in 2022. If you pay with cash, you can avoid being a part of the auto debt statistics.

Pro: Lowering Your Insurance Premium

Owning a car with no payments is a terrific feeling. You’ll save money with no monthly payments, and you can also decrease your insurance premiums. Your insurance payments will likely be higher when you buy a new or used vehicle. The repairs will be more expensive for a new car than an old one. 

If the bank or credit union owns your vehicle, the insurance company will take that into account, also. Buying a car with cash can decrease these insurance premiums. Your monthly payments will decrease as the vehicle depreciates. Nowadays, insurance companies offer discounts to drivers who practice defensive driving and stay safe on the roads.

Con: No Credit Building

One of the primary disadvantages of buying a car with cash is you miss the opportunity to build your credit. Don’t be mistaken. Being debt-free has its perks. However, taking out an auto loan and making payments on time can build your credit score. Paying off a car will look good on your credit report and can help you with future purchases. For example, a higher credit score will make you a more qualified homebuyer. 

Con: Diminishing Your Emergency Fund

Your emergency fund is something you should be aware of when buying a car with cash. Do you have enough money to get through an emergency, like an unexpected hospital visit? About 40% of Americans say they don’t have enough savings to cover a $1,000 expense that appeared suddenly. 

A good rule of thumb is to have enough money to get through three months of expenses. Paying for a car with cash can have benefits, but it would be unwise to drain your bank account because you never know what emergency will arise.

Con: Missing the Special Deals

Sometimes, you can save money by paying for the car in cash. However, that’s not always the case. At the dealership, you may encounter an opportunity to get special savings through financing. Auto manufacturers incentivize dealerships to put customers on auto loans by giving them bonuses. Sometimes the dealership will provide special discounts to customers who finance the car. The people paying with cash will have to pay more. 

Con: Limiting Your Potential Purchase

The last disadvantage of buying a car with cash is you’ll likely limit your options. Car prices have soared in the past couple of years. Supply chain issues and a chip shortage have inflated car values. In the first half of 2022, the price of a new car eclipsed $42,000, and used cars weren’t far behind at $33,000. Experts say the prices should go down, but they’re still sky-high. Financing may be a better option unless you can fork over that amount of cash. 

Buying a Car With Cash: A Big Decision

In life, your financial journey can take you anywhere. You’ll make big purchases like a wedding, a house and a car for the driveway. For the sleek new vehicle, you may consider going the route of paying in cash. Before doing so, you should review your financial situation and read this list of pros and cons.