While it may be tempting to try to get a better deal when buying a car by waving around a wad of cash, it may not get you as far as you hope.
While it’s true that some dealerships run “Cash Incentive” deals from time to time, in general, there are a few reasons that paying cash for your next vehicle may not get you the amazingly good deal you want.
Why paying cash for your car may not work to your advantage
Financial gurus love to tell people that “Cash Is King” and bringing cash with you to the negotiation table will automatically give you the upper hand.
From the dealership’s perspective, a buyer who has cash in hand often represents a less profitable sale. If the buyer isn’t paying interest on the purchase, the dealership makes less money. This may not matter to the buyer, but it also means that there is less room for negotiation on the price of the car.
Cash buyers also tend to skip the extended warranties, interior protection packages, and paint protection packages, all of which represent a significant profit center for automobile dealerships.
How accessing your home’s equity to pay cash for a car can backfire
If you are considering taking out a second mortgage or using a line of credit attached to the equity in your home so you can enjoy a lower interest rate, it’s especially important to understand that paying cash for your vehicle may not work to your advantage at the dealership.
When you finance a vehicle then encounter unexpected financial trouble, in a worst-case scenario you’ll lose the car.
If you use your home as collateral to access cash so you can buy a car, no matter what kind of financial hardship you face, your car will not be repossessed. However, the scenario created here is much worse than a car repossession. If you fail to make timely payments on your second mortgage or your home equity line of credit (HELOC) loan, it’s quite probable that you’ll end up in foreclosure.
Many people use the equity in their home to access cash because it’s convenient, typically has a low interest rate, and the payments are low because the terms are longer than a car loan or unsecured personal loan. Statistically these loans take longer to pay off and result in a higher cost of borrowing throughout the full term.
You may be better off financing the car, even if you have the cash in hand
Not every buyer has to take out a HELOC or second mortgage to get a better interest rate than they would have on a car loan.
Some buyers have access to large amounts of cash and prefer not to participate in any type of financing. In this case, it may still be to the buyer’s advantage to take part in a 0% interest financing deal, make the payments, and keep their cash in an interest-bearing account.
Most financing is open-ended, which means that the buyer can pay ahead on the loan, or even pay it off at any time without penalty. That option allows cash buyers to hang on to their money to fund an emergency account, collect interest on the cash, or use it as an investment.
In some cases, a lease beats paying cash
Certain automobile brands allow buyers to lease a vehicle with a one-time lease payment upon delivery of the vehicle. When the lease term is up, the buyer has the option to buy the car.
In this scenario, the buyer pays minimal interest amount. They can keep their cash in an interest-bearing account during the three-year lease term. When the lease is over, they still have the option to walk away or pay for the car with cash.
If you must pay cash
First, ask your salesperson if there are any cash incentives available. Sometimes, if there’s a 0% financing promotion, there is also a cash incentive option that includes a discount on the price of the vehicle. Not every dealership has a standing deal like this, and without it, the only advantage to paying cash is not having to pay interest on a car loan.
Talk to your car salesperson about all the options before paying for your new car with cash.