Should you consider paying cash for a car?

The thought of not having a car payment is a very liberating one. If you’re a super saver, you may be asking yourself if you can buy a car with cash. But can you afford to deplete your cash reserves for a new set of wheels? Are there actually advantages to taking out a loan? And is it cheaper to buy a car with cash? By the end of this article, you’ll know all the pros and cons, how to buy a car with cash and if it’s right for you.

Advantages of buying a car with cash

Before diving into how to pay cash for a car, take a look at the upsides and downsides of doing so. The biggest advantage of paying for a car outright is avoiding paying interest and saving that money instead. For example, if you buy an average priced, new car for $33,500 and finance the entire amount at 3% interest over 5 years, you’ll end up paying $2,617 in interest over the life of the loan. That means you’ll end up paying $36,117 for that car if you finance it.¹

The second big advantage of paying cash for a car is not buying more car than you can truly afford. If you’re paying cash, you have to set a strict budget to avoid completely depleting your savings. If, say, you’ve saved $27,000 to purchase a vehicle, you’re likely to stick with that. But if you’re financing, it’s easy to justify spending just a few more dollars each month, even if it means you exceed your overall budget.

Disadvantages of buying a car with cash

If you’re thinking about how much could you save by buying a car with cash vs. financing, there’s one big factor you need to keep in mind: your investments. If you put a big chunk of your savings into the purchase of a car, that’s money that’s not going into a savings account, money market or other investment tools that could be earning you interest. That being said, it depends on the interest rate you’re getting for the car loan and the interest rate you’re earning on your investments. This table can help you understand the math while looking at your finances.²

The second con to paying cash for a car is the possibility of depleting your emergency fund. You don’t want a car purchase to mean you can’t pay for unexpected repairs on your home or surprise medical bills. In general, you want to have 3 to 6 months of living expenses on hand to pay for emergencies.³ If you can pay for a car outright and still have that much money set aside, then this shouldn’t be a factor for you. But if you don’t have that much cash on hand and you need a new car, financing is always an option. Just be sure to shop around for a low interest rate to make sure you’re saving as much money as possible.

How to save cash for a car

Now that you’ve taken a look at the pros and cons of paying cash for a car, you may be ready to start saving money to make that happen. But how do you save money to buy a car with cash? Planning will be the key to your success here. First, research what kind of car you want to buy and its MSRP, or how much the manufacturer recommends the car be sold for. You won’t necessarily pay that much once you get into negotiations (we’ll talk about that later), but it’s always good to have a little extra saved up, especially for costs like taxes, titling and other fees.⁴

Once you’ve picked your dream vehicle, it’s time to create a savings plan and deposit your savings into an account with a great interest rate to help you reach your goal more quickly, putting you in a new set of wheels sooner. You can also set up an automatic savings plan to make sure other expenses don’t dip into your vehicle nest egg.

If saving up to cover the cost of a brand-new car is making you a little nervous, you can always consider buying a used car with cash. Not sure which you can afford? As a general rule, you should spend no more than 35% of your annual pre-tax income on a vehicle, but that can vary.⁵ This calculator can help you figure out how much you should spend on your next car.

Still concerned about saving up enough cash to buy a car? You have a third option. Consider making a large down payment on a car with the money you have saved up and taking out a smaller loan. The average down payment on a car is about 12% of the purchase price, but conventional wisdom says 20% can be a good number to aim for.⁶ You’ll be able to reduce the amount of interest you’re paying and still put money toward investments.¹

How to negotiate with cash

If you’ve gotten this far, you might be ready to head to the dealership to pay cash for your new car. But unless you’re using a no-haggle car-buying option, you’ll need a few negotiation tactics to make sure you’re not paying more than you should. The first and most important tip is to not tell the dealership you’re paying with cash up front. Negotiate the price, get it on paper and then show your cards (or in this case, your cash).¹

The dealership will probably want to talk to you in terms of how much your monthly payment will be. Instead, be vague about how and if you’ll be financing the car and get them to talk in terms of the total price of the car. That way, you’ll know exactly how much you’ll be paying, and you won’t have any surprises during the final transaction.⁴

So is it better to buy a car with cash? Regardless of whether you choose to pay with cash, go for the loan or put down a large down payment, you can feel confident knowing you have the information to help you make the best possible decision for your budget and that you’ll know how to save money for a car, no matter how you pay.