We’ve all heard it. Debt is bad. Avoid it at all costs. If you can’t afford to pay cash, you can’t afford it! So it must be certain that it is always in our best interest to pay cash for a car instead of financing it, right? Well not so fast. There are, of course, positive reasons to buy a car for cash. However, there may be an even better argument to finance instead (sorry Dave Ramsey!) Here are 4 reasons why you should and shouldn’t, pay cash for your car.
1) Why You Should - Frees up your monthly financial obligations
True, paying bills can be stressful on a lot of people. Not having a car payment is something that a lot of families can’t wait for. Not having a car payment can help free up money to pay other expenses as they come.
Why You Shouldn’t - It may deplete your emergency fund
You may be freeing up some cash each month, but at what cost? If you’re paying cash for a car and as a result, have little to no savings left, that may not be the safest move for you and your family. It’s always best to have savings (6 months' living expenses seems to be the standard) in the event of a job loss, a medical emergency or anything else unforeseen (nobody predicted Corona). What happens if the car you buy ends up having a major mechanical problem? Which brings up another question, did you sacrifice on the safety of the vehicle to be able to afford it? You won’t want to skip on cutting edge safety features just because the car is older and more affordable.
2) Why You Should - You’ll save a ton of money on interest
Interest can add up fast. Depending on how high your interest rate is, and how long you intend to finance, some people almost pay for their car a second time just in interest! Not knowing or caring how much money you throw away due to interest paid on loans and credit cards plays a significant role in families not getting ahead of their finances. The money saved on interest could instead be put to better use such as a Roth IRA or 401(k).
Why You Shouldn’t - Money can be cheap, and you’ll deplete capital for better investments
Depending on your credit, there are some amazingly low interest rates out there. If you’re looking to shop for them, companies like PayLow Rate help you find the lowest rates available to you from multiple lenders. Simply put, if the interest you can earn by investing the money is higher than the interest you pay for the loan - it’s better to get the loan and use that capital you would’ve spent more wisely.
3) Why You Should - Keeps your debt to income low and no chance to default
The number one reason why a person may get turned down for a mortgage is not because of their credit score - it’s because their overall monthly debt compared to their monthly income is too high. By not having a car loan, this will help your chances of an approval, and being approved for a bigger home. Not to mention, not having any debt will make it impossible to default on the car loan, sinking any chances of getting a mortgage with it.
Why You Shouldn’t - You miss out on building your credit
One of the best ways to increase, or establish your credit score is by making your car payment on time, every month. What good is keeping your debt to income down, if you haven’t built your credit well enough to get approved? Even if you did get approved, the better your credit is, the lower your interest rate will be which will help keep your mortgage payment as low as possible, which will be considered in your debt to income when the bank is deciding on approving your mortgage or not. If you do get in a debt to income situation, PayLow Rate helps customers refinance their car loans all the time specifically to help obtain a mortgage.
4) Why You Should - You won’t get caught negotiating payments at the dealership
One trick dealers love to use in order to separate the most amount of money from you and your wallet is to negotiate on monthly payment, and not the price of the car. You should know what your budget is going into the purchase, and only having to haggle on the price and the price alone, assures that no “sleight of hand tricks” can be made. Remember, no matter how prepared you are to best the dealers, you might only buy a car once every 7 years. They sell multiple cars every day.
Why You Shouldn’t - You can get a better deal if you finance
You may have heard that you can get a better deal from the dealer by paying cash. If you puff your chest and tell the dealer that you’ve got cash in hand today - surely they’ll break out the red carpet and offer the best deals, right? Well, whoever has told you that is dead wrong. Dealers do not care if you’re paying cash. In fact, they downright hate it. In many cases, dealerships can make more money on the financing than they do on the sale of the car. That’s because often, they can mark up the interest rate by as much as 2.5% and take home the profit. Even if they don’t mark up the rate, they're guaranteed to profit something from the lender they assign your loan to. If the dealer knows they have extra money coming from the lender, they may be more flexible on the price. Manufacturers all have their own lending arm as well (think, GM Financial) and they could even be running rebate specials if you finance the new car loan. If you’re worried about getting stuck with too high of an interest rate, PayLow Rate can often refinance your car loan to a lower rate before you even make your first payment!