Should I pay cash for a new car or a used car?

Times are tough for the new car market, but used cars are not without problems. When it comes to buying a new car or a used car, is it worth paying cash? Is a loan a better idea? Kelley Blue Book offers helpful advice to help buyers make the right decision.

Kelley Blue Book says dealers prefer financing for new and used cars

Used cars and relatively new cars are at a car dealership | Pablo Monsalve/VIEWpress via Getty Images

According to Kelley Blue Book, there’s a reason dealerships prefer cash financing. In some cases, this can be a lost opportunity to make money on extras. These may include accessories or extended warranties that may offer a commission to the seller.

If a cash buyer is able to negotiate the price of a car down, accessories or other extras are less likely to significantly change the price. In many cases, this means the buyer won’t add more. In the case of financing, extras and accessories would only slightly increase the monthly payment. Kelley Blue Book indicates that a dealer usually earns about 1% of the loan value. That would be about $300 commission on a $30,000 loan.

However, there are still many good reasons to pay cash for a new car or a used car.

Benefits of paying cash for a new or used car

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  • No interest payments! By not paying interest on your loan, you can save thousands of dollars when buying a car outright. Kelley Blue Book says you could save $5,200 on interest if you buy a car that costs $47,077 (the average price of a new automobile lately) in Florida with a $3,000 down payment and a tax of sale of 6% on a loan term of 60 months.
  • You only spend what you can afford. If you only have a certain amount of money, you cannot spend more than that. A cashier’s check is a good idea for any vehicle over $10,000.
  • Buying your new vehicle with cash means it’s yours. You accumulate no additional debt when buying and your other cash is freed up for other things.

Some of the disadvantages of paying cash for your new car

  • The selection could be more limited. If you want to pay cash for your new car, you are limited to what is available at that time. If you are looking for a particular style of car, such as a truck or van, you may not be able to get exactly what you are looking for. A long would give you the chance to find a better vehicle from a larger selection.
  • A certain brand may offer buyers a low interest rate. Sometimes automakers want to move vehicles off the land that will suit the buyer. Dealerships may offer a low interest rate or even sometimes no interest if the buyer is financing through the automaker. This could be a good opportunity for a better deal.
  • If you decide to pay cash for a used vehicle, be prepared for repairs and maintenance. Putting money aside in advance can be useful in an emergency.
  • Some buyers don’t have enough money to buy a car. If the buyer lives paycheck to paycheck, it may not be possible to buy a car. Some people have a retirement fund or money set aside for emergencies, it’s probably not a good idea to use it unless absolutely necessary.
  • If you’re trying to build your credit history, paying cash won’t benefit that aspect. If you want to be able to buy a house or anything down the line, it’s important to have good credit and a good payment history.

It’s ultimately up to the buyer

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Only you know your finances and can determine the best route. Buying a car with cash has some advantages, but these don’t make sense for everyone. Making your own list of pros and cons can help weigh the right decision.

Buying a car with cash can allow buyers to pay off other debts without car payments. However, if you want to improve your credit, a car loan is an easy way to do it. Making regular payments on time will improve your credit score over time. You might be able to get a lower price by paying cash, but that’s not always the case. Sometimes the dealer can give you a better deal with a loan.

Check your insurance policies and options before settling one way or the other. Knowing how much your car insurance will cost is an important factor. Sometimes a newer car will cost less thanks to updated safety technology.

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