Buying a Car with Cash: Pros and Cons

You've found the perfect vehicle that fits your needs and budget, and now you're wondering how to pay for it. Buying a car with cash has benefits and drawbacks. It's helpful to weigh the pros and cons first, so you don't end up making a decision you regret later.

Before you spend a sizable chunk of your savings, determine if buying a car with cash is right for you. Also, make sure you're covered with the right car insurance before you drive the car off the lot. A local independent insurance agent can get you set up with the ideal amount of coverage. But first, here's a guide to the pros and cons of buying a car with cash.

Is It Smart to Withdraw from Savings to Buy a Car With Cash?

If you can answer yes to the question, “Can I buy a car with cash?” make sure you’re not thinking of dipping into your retirement account. Taking even a small loan from your retirement funds could leave you in a bind when you really need that money. In addition, withdrawing money from a retirement account usually comes with a tax penalty. 

Whether or not you should buy a car with cash is a trickier question to answer. If you'd have to use your other savings to buy a car with cash, make sure you leave enough to weather unforeseen events. In better economic times, financial advisors recommend that people have at least three to six months' worth of emergency savings to pay bills (i.e., mortgage/rent, utilities, insurance, food, gas, etc.) in case they lose their jobs. 

These days, some financial experts actually recommend that you have at least nine months in savings, as extended periods of unemployment are more common. You wouldn't want to drain your emergency funds when deciding how to buy a car with cash.

So, can you buy a car with cash? If you can comfortably afford to draw from your savings or emergency funds for an extended period, then you probably can. Otherwise, it may not be a wise decision.

Pros of buying with cash:	Cons of buying with cash:
You don't have a monthly payment.	You decrease your savings for unforeseen events.
You pay no interest.	You lose any investment opportunity for the cash.

Consider Interest Rates Before Buying a Car

When interest rates are low, it might make sense to take out a car loan to pay for your car and invest your cash elsewhere. These days, high interest rates make paying cash for a car a far better option if you can swing it. 

Many factors play a role in car loan interest rates, but your credit score is the most important factor. Your credit score is reflective of your debt and payment history, as well as how many accounts you have and how long you’ve had them. 

Here's what you need to know about car loans: 

• The average interest rates on car loans currently range from 5.25% to 15.77% for new cars and 7.13% to 21.55% for used cars.
• Car dealers advertise annual percentage rates (APRs), which include the actual interest rate as well as fees and other costs that come with the loan. 
• Current APRs range from 4.32% to 12.28% based on your credit score and the kind of car loan you're applying for.
• Your car’s age and condition, your loan term, your debt-to-income ratio, your loan-to-value ratio, and other factors also influence the interest rate you'll be offered on a car loan. The type of vehicle, such as an electric vehicle, sedan, truck, or SUV, also influences the APR.

Lower interest rates on car loans can have many benefits. Consider the following.

Pros of a low interest rate:	Cons of a higher interest rate:
You can leave your savings alone.	You will pay more for the car over the life of the loan.
You can invest that money elsewhere.	Your monthly payments will be higher.

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Consider Your Credit Score Before Buying a Car

Another aspect to consider when deciding if buying a car with cash is right for you is your credit. Buyers with few credit lines or a short credit history may want to borrow rather than pay cash as a way to establish credit. Building a healthy credit history can be a great way to save well beyond the life of the car, since you can secure lower interest rates on future purchases by doing so.

If you have a long and clean credit history, buying a car with cash makes more sense. However, many new car dealers offer interest-free car loans to buyers with the best credit scores. You may want to take advantage of this type of borrowing if you qualify. Freeing up that cash for other daily expenses may outweigh your desire to be debt-free. 

Pros of using credit:	Cons of using credit:
You build good credit by making payments on time.	You have to send monthly payments.
You may be able to take advantage of zero interest loans from the manufacturer.	Your credit may already be great and you do not want or need to take on more debt.

Creditors group people into categories, or credit bands, based on trusted credit-scoring models. Your credit band has the most influence on the interest rate you can get for a car loan. The table below illustrates average car loan interest rates by credit score. 

Weighing the Cost of Used vs. New Vehicles

If purchasing a pre-owned car with cash is substantially cheaper than buying a brand-new car with financing, then a used vehicle may be a better option for you. However, be sure to factor in the cost of maintaining an older vehicle first. While purchasing a used car allows someone else to take the depreciation hit, the maintenance bills can add up quickly. 

If you leave yourself fewer reserves by purchasing a used vehicle with cash, you may find it difficult to afford the repairs needed for an older car. On the other hand, financing a used car often has higher interest rates than buying a new vehicle with a car loan. It's important to calculate the differences to find out what your savings would be if you buy a car with cash.

Buying a Car with Cash: The Bottom Line

After considering the above factors, if you decide to purchase your car with cash, you may be wondering what to do next. Here are some final tips:  

1. Make sure you've chosen the right car, and do your research. What is the Kelley Blue Book value of the vehicle you've chosen? This will contain both the dealer's new car price and what a private seller should be asking for their pre-owned vehicle.
2. Decide whether you want to make your cash purchase with a dealer or a private seller. Private sellers often only accept cash.
3. When you're ready to buy, don't mention to the dealer that you'll be paying cash until after you lock in the purchase price. Sales representatives make a commission on car loans. If they know they won't be making that money, they may "neglect" to inform you of discounts for which you may be eligible.

Finally, you can ask trusted family members and friends for advice about what worked for them when buying a vehicle. You'll likely find that purchasing a car with cash vs. financing is beneficial to some individuals but not others. As such, it's critical to weigh the right decision for you and your unique financial situation.

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Here's How an Independent Insurance Agent Can Help

Don't forget about lining up car insurance for your new car. You're required by law to carry a certain amount of coverage to drive legally in almost every state. When it comes time to find coverage, an independent insurance agent in your area is the best way to source low car insurance rates and get personalized service. Your agent can also help you find car insurance discounts to reduce your premiums even further, and even file car insurance claims for you down the road.