If you’re buying a vehicle from a private seller, you may have a better chance of getting the price you want if you bring cash to complete the transaction. However, if you’re buying a car from a dealership, cash isn’t always king.
Paying cash will not give you trading leverage
Many times I have heard this from car buyers: “I don’t know why the dealer didn’t accept my offer. I paid cash!”
Unlike private sellers, most dealerships would prefer that you get a loan for your purchase. Often, dealers make a little money with the loan they give you. It’s called “dealer reserve” and it basically works like this: you’re approved for a 60 months 2.5% loan, dealer tells you you were approved at 3.5%. If you accept the the 3.5 loan percentage, the dealer pockets the difference. This is all perfectly legal and very common.
If you bring in outside financing, whether it’s your own money or a check from an outside source like a credit union, the dealership loses that ability to build up the reserve. Plus, cash buyers can usually bypass all those finance and insurance spiels about how you should “protect your investment” with an extended warranty, service plan, or other add-on. These products are big money for dealers, so if they know right away that they can’t make money from you, they may be less likely to get a good deal on the car itself.
You might be a “cash buyer” even if you get a loan
Most cash-paying buyers don’t come to the dealership with a suitcase full of packed bills, but some choose to use their savings and pay for a car all at once rather than take out a loan. However, most dealerships consider you a “cash buyer” if you use a non-dealership financed payment method. A common example is someone using a check from their bank or credit union.
If you’re paying for your car with your own money, it’s usually best to get a cashier’s check, also known as a cashier’s check. Many dealerships don’t accept personal checks because they don’t want to risk a personal check bouncing after you leave with your car. Before taking delivery of your vehicle, I recommend speaking with a dealership manager to see which method of payment would work best.
A good dealer won’t care if you’re a cash buyer.
Recently I’ve described some warning signs of a sleazy car dealership and mentioned that there are basically two types of stores: those that only care about taking every penny you have whether you come back or not, and those that understand the long game of a fair deal and good customer satisfaction.
Although some dealerships are not so welcoming to cash buyers, a savvy dealer knows that if these customers are treated well, it will often result in a quick sale and a better likelihood of good survey results. Plus, if a dealership knows they have a cash buyer, they don’t have to worry about the deal failing because the customer didn’t qualify for a loan. One of the worst scenarios for a salesperson is to spend hours working on a deal to get it settled in the finance office. If you shop at a dealership that serves a lot of “credit-troubled” customers, they may be relieved to have someone with the cash ready to go.
The question I frequently get from car buyers is – “Should I tell the dealer that I am paying cash? »
I used to tell people to just focus on the price of the car and not divulge the fact that you are a cash buyer until the last minute. However, since some incentives and discounts are tied to fundinglike a zero rate loan or a repayment scenario, I adjusted my advice.
If a dealership asks you how you’re going to pay for the car, try the following: “I will most likely use my own funding, but I would be open to other options if they are favourable. However, give me quotes based on a cash transaction. »
Paying with your own money now could make it harder to get a loan later
Unless you have boatloads of cash lying around, sooner or later you’ll have to play the credit game. For most people, there will be multiple times when they need to borrow money to make a purchase. If you play the credit game badly and get into debt, you may have financial problems. On the other hand, you can also find yourself in a difficult situation by choosing not to play at all.
Some people seem to think that no debt equals good credit. The reality is that having no debt won’t lower your score, but it won’t improve it either.
Without getting too deep into the exact calculation of your FICO score, remember that your solvency is basically your ability to borrow money and pay it back. The better your track save with taking out loans and making payments on time, the better your score will be. While buying a car with cash doesn’t have a direct negative impact on your score, not taking out a car loan can make it difficult when you really need it.
Not too long ago, I had a client in his 40s who only bought used cars between $8,000 and $10,000 cash. He did this for a long time, then decided to buy a new one car, because he had no history of regular payments on a car loan, he could not qualify for a little interest rate. He had the ability to borrow money earlier in life and pay it back back, but chose not to thinking that paying in full was the most responsible decision and that was probably purely financial. However, it seems that the lenders later penalize you for not taking these loans.
Even if you can pay in full, it might make more sense to take out the loan
If you absolutely hate the idea of having car payments, so by all means deposit the money and leave frank and clear. But with many automakers offering zero percent financing or really little interest loans, you may not want all your money tied up in one place. Instead of pulling thousands of dollars out of your bank account, if you can take advantage of cheap financing, that money could be better spent on things like an emergency fund, investments, real estate projects, or paying off debt. other debts that carry a much higher interest rate. .
Plus, some dealerships will offer additional discounts if you finance through them. In these scenarios interest rates aren’t always the best, but you can take advantage of the discount, then make a lump sum principal payment and cancel the loan.
For example, I had a client who was going to buy a new Toyota Camry and give it a full refund. The dealership offered an additional $2,000 discount for taking out one of its loans, at a not-so-high annual rate of 4.5%. However, because his state doesn’t have a prepayment penalty for auto loans, he took out the loan, got the forgiveness, made payments for two months, and then wrote a check for the balance on the car.
The loan was canceled and he saved two thousand dollars on his car. Of course, this strategy only works if you have the money to pay in full and your state has no prepayment penalties. You don’t want to be stuck with a higher interest loan long term, especially if you can qualify for something better.
That you are pay with money you’ve saved or come in with a check from your credit union, being a “cash buyer” can give you an advantage at the dealership. Just be sure to look at all angles to see which financial option is the best for your purchase.
If you have a question, tip or anything you’d like to share about buying a car, send me a message at [email protected] and be sure to include your Kinja handle.