Paying cash for a car is often considered financially prudent, according to AutoTrader. However, you need to weigh your personal financial goals and the interest rate on your potential loan to decide whether to pay cash for a car.
Conservative consumers generally pay cash for most purchases, including cars. A primary advantage of paying cash is that you don't take on a loan with monthly payments. You may also save hundreds or thousands of dollars in interest payments over time. With a car loan, you risk losing the vehicle to repossession if you default. Plus, late payments hurt your credit score.
When you pay cash, you also own the car outright and have clear possession of the title. For some people, the pride that comes with ownership is a key psychological advantage. Owning the title without a lien offers more flexibility when you want to sell as well. A well-maintained vehicle that you own outright gives you leverage as a trade-in or allows for strong equity value if you sell privately.
Financing offers a couple key benefits compared to paying cash for a car. A loan typically enables a higher-dollar car purchase. You may have $10,000 cash to put toward a car, for instance. Rather than being limited to vehicles within that budget, you can put some or all of it as a down payment and get a much more expensive vehicle with financing.
Also, you preserve your cash for other purposes when you finance, notes Cars.com. For some people, the safety net of having $5,000 or $10,000 in cash in the bank is more valuable than saving a few percentage points in interest on a car loan.
The Interest Rate Impact
Even while weighing the pros and cons of paying cash, the actual interest rate on a loan often plays a key role. Financing makes the most sense when you carry a very low interest rate, whereas paying cash is sensible when rates are relatively high. AutoTrader indicated that a 1-percent rate on a $20,000 car loan for three years leads to about $300 in total interest charges. In contrast, a rate of 4 or 5 percent would lead to interest well over $1,000. Some banks offer zero-percent financing for highly qualified buyers, which further reduces the benefits of paying cash. You could hold onto your money and invest it, while making the monthly payments.