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Financing a car is almost an automatic step. With the cost of the average car in the neighborhood of $32,000, very few people pay cash for a car. Yet this is just one of many times we shouldn’t go with the flow. There are plenty of reasons to pay cash for car, as well as a number of ways to do it.

This topic came to mind in response to an email that I received from a listener named Stephanie.

Hi Rob,
I recently graduated from graduate school and have a good paying job. After getting the job I immediately bought a brand new car because I had no money to put down and my old car broke down. I financed the car for 60 months at 0% interest. I used the rebates on the new car as my down payment. The balance of the loan is a little over $32,000 and I am also paying off credit card debt of $5,000, which is also interest free for a few more months.

When I finish paying off the credit cards, is it worth it to pay off my car early considering there is no interest on the loan? Also my gross income is about 4 times the cost of the car and the payment is 4.25% of my gross monthly pay and about 8.5% of my
net monthly pay. I bought a top of the line Ford Fusion. Did I purchase too much car considering my income? Thanks in advance for any advice that you can offer.

Stephanie is asking all the right questions! But we can boil it down to two primary questions, and I’ll take a shot at both:

  1. Should I Pay off the 0% loan early? My answer is “no”. There is no reason to pay it off, even if you have the cash. Having money in the bank gives you liquidity, and that makes everything easier. And if you can earn interest on your savings – while paying zero on the loan – you come out ahead by not paying off the loan early.
  2. Did I purchase too much car considering my income? Based on income alone, she didn’t buy too much car. But let me add that I think this is actually the wrong question. The better question is did I purchase too much car based on my overall financial situation? In that case my answer changes. Considering that she had to finance the purchase and has credit card debt, then the answer is “yes”, you purchased too much car.

Car dealers love to put people into new cars based on their income. Realtors like to do the same thing with homes. As a rule of thumb, never, and I mean never, ask a car salesperson how much car you can afford. Ditto with realtors and homes. When it comes to cars, how much you can afford should depend on your overall financial situation, namely, your income, assets, net worth, and future goals.

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Even if a new car payment fits neatly into your income, it may not be right based on the bigger financial picture in your life.

Why you should pay cash for a car?

The short answer is because owning a car is expensive! And owing money on it makes it even more expensive. In its 2014 survey, AAA determined that the average cost to own a car is $8,876 per year, based on 15,000 miles of driving. Now that’s an average, and it can be affected by the cost of the car you own, how much you drive, where you live, and of course, how much you borrow to buy it. It’s an ugly number, especially when you consider that many or even most households have two or more cars.

But let’s get a little bit more specific; why should you pay cash for car?

1. You’ll spend less by paying cash. Paying cash for a new car is tough. It hurts to pull money from a savings account to buy a car that you know will go down in value. That will serve as the built-in limit on how much you will pay for the car. On the other hand, it’s pretty easy to sign a note to cover most of the cost of buying a new car. You won’t be so concerned with the final cost of the vehicle, as long as it isn’t coming directly and immediately out of your bank account. Financing will encourage you to buy a more expensive car.

2. Paying cash can get you discounts. You may have to make a choice between a rebate (discount on the price) and zero interest financing. That means that zero interest isn’t free. Cash gets you the discount price, which is the cost you pay for taking advantage of zero percent financing. And when you pay cash, you may even be able to negotiate a better price, particularly on a used car.

3. You avoid paying interest. This is of course completely obvious, but it’s worth repeating. If you don’t finance your purchase, you won’t pay any interest. How important is that? If you borrow $32,000 for five years at 6%, you’ll have a payment of $618.65 per month. That means you’ll pay total interest of $5,118.98 over the life of the loan.

4. Paying cash requires financial discipline. It takes discipline to pay cash, because paying cash is not easy. But when you develop discipline in one area of life, the spills over to other areas, and this will serve you well.

I recently came across a quote that makes this point better than I can:

“People get better at regulating their impulses. They learn how to distract themselves from temptations. And once you’ve gotten into that willpower groove, your brain is practiced at helping you focus on a goal.” – The Power of Habit by Charles Duhigg

5. It forces you to make an assessment of what is most important to you. You will not get as nice a car paying cash as you will if you finance it. But that forces you to contemplate how important the car is to you. How important is it compared to choosing between the car and getting out of credit card debt, saving for retirement, or paying for your children’s college?

6. It enables you to prioritize other financial goals. Paying cash forces you to think about the financial priorities that are most important.

How to Pay Cash for a Car

Talking about paying cash for a car is easy enough. But how do you actually do it if you agree that it’s the right strategy?

  1. Get real about what you can afford. Stephanie has this figured out, but many people rely on the car dealer to tell them – and it will be the most expensive car possible when they do. You have to decide how much is enough, based on your total financial situation, and on your future financial goals.
  2. Get real about what you should afford. Just because you can afford it, doesn’t mean you should buy it. The decision about buying a car can’t be answered in a vacuum. You have to look at how the payment will impact your life.
  3. Sell your existing car and buy a cheap one. If it was a mistake, then your first goal is to get rid of the big debt. If you’re underwater, do you have the cash to buy a cheaper one?
  4. Set up a budget item for your next car. How much do you need to be saving to buy your next car with cash? Know the car, the price range, and how long it will take you to accumulate the money needed. This also forces you to compare your goal of buying a car to buying a home, funding retirement, saving for your child’s education, and any other goals you have.

Cars seem trivial, but they really are expensive, especially over a lifetime. And after a few months, the car isn’t new anymore, and it doesn’t feel as nice. My current car doesn’t feel as nice as the first car I bought, because the car I drive now isn’t as important to me as it once was.

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Author Bio

Total Articles: 1080
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments

David says:

iMO, debt of any kind is a form of slavery. Debt must be serviced and therefore causes stress that influences behavior and personal choice. A person who hates their job can’t resign because payments must be made. That leads to the never ending need to salve a miserable existence by getting the sugar high of the next financed purchase. Debt is a fools game that ruins lives and slowly poisons personal happiness.

Jaia says:

People look at me strangely when I say this. Debt keeps you locked in a never ending cycle of playing it safe and working a job you may not enjoy so you can buy a bunch of stuff you may not even need. I’m not such a Spartan that I believe we should all go into the wild and live off the land, but credit is ‘cheap’ and allows people to indulge themselves now rather than waiting until they are in a better position to do the things they want to do.

Cattoo says:

You are so correct. Working a job you do not like to pay bills that you may not have had because you wouldn’t have gotten the thing you didn’t need if you didn’t have the job you now have. Yet because you have the job you now have you have to pay the bills you didn’t want for reasons that seemingly made sense thirty years ago.

James Humphrey says:

I’ve paid cash for the last three car purchases…

However, with the last one I learned not to take the wife with me. She’s a person whose never met a stranger, including car salesmen. Within 30 minutes of talking with the sales person she informed them of what we were willing to pay… Surprise, that’s what the car eventually cost us…

Visitor says:

Exactly, who you bring with you is essential, car buying is an art.

Olivia says:

We never purchase new cars, but taking a loan out to purchase a vehicle when we were desperate, was a real eye opener. The bank wanted full replacement cost insurance. On top of that was interest. We only did that once, even though there were times we really had to scrape to get it together. The efforts were well worth it.

Doug says:

The reason I buy new cars – and I have always paid cash – is that I know how they are treated for their life time. My current car is approaching 19 years. Maintaining the car from its first few miles pays dividends in the length of time the car will last. My cost per year in total is roughly $3,000 which is a fraction of the cost of one I would keep for only 5 years. That cost includes roughly $1,000 for maintenance which extends the life of the car.

Rob Berger says:

Doug, great point. It’s not just how much you pay, it’s how long you keep the car. We have three cars right now, one is 13 years old, one is 10 years old, and our newest is a used Camry I bought in 2011.

19 years is amazing.

Joan Yost says:

Hi Rob,
I live in a city with pretty inadequate public transportation and I am job hunting. I scoured the used car ads and talked to my credit union about a loan. Then I began looking for a bicycle. I can easily bicycle to the main transportation depot, even in bad weather. I found an excellent used bicycle and I anticipate spending several hundred dollars on riding gear, including panniers, a good helmet and foul weather gear. There will also be costs for maintenance and transit costs down the road. However, I will have paid the big upfront costs and I won’t need vehicle insurance or gas. Altogether, I know this will cost less than purchasing even the most inexpensive used car I could find.

I would love to see a comparison of the costs between my two options on your blog. Comparing the cost of owning a scooter would be interesting, too.


Rob Berger says:

Joan, thanks for sharing your story. No doubt you’ve taken the less expensive route. But more than that, it’s a great way to embrace life.

Betty says:

Would it be silly to save up for a car by investing – like using Betterment or some other auto invest vehicle?
Had to use my car fund for a family medical emergency and am starting over. Savings acct pays almost nothing & it is going to take me at least a year maybe two to save up given medical bills that are still popping up and I fully participate in my employers 401K to get the vested match.

CD’s lock in the money for a certain time with penalties for early w/drwl and what worries me is if the old car dies before I can get the car fund up to to my magic minimum number and I need to buy something within a week or two.

Rob Berger says:

Betty, the problem will be what you’ll invest in with Betterment. Stocks are not ideal for such a short time period. I generally won’t invest money in stocks that I think I’ll need in the next five years. While bonds are less volatile most of the time, the low yields for short term bonds are often no better than a savings account. If I needed the money in the next year or two, I’d stick with a high yield savings account.

Johnny Shi says:

I really never considered basing my purchases on my overall financial situation. That is a much better suggestion. It wouldn’t be the best option to buy a car based on your income and a house based on your income because each purchases subtracts from the overall income. It makes so much sense to me. This is something I have never understood before. Thanks for sharing.

sabrina rowlette says:

I live in Vancouver Washington. I recently purchased a new car for 26K and paid cash. One week after I purchased the car, the sales person called me and said the State of Washington would like to know where I got the cash. He could not give the name of a contact person he talked to at the State of Washington, so I told him that he doesn’t have a right to know that information, and to have the State of Washington call me if that need the information. FYI, I am a 60 year old retired African American. Do I have the right to sue the dealership, because I feel like my civil rights have been violated.

Jdy says:

Whoever accepted that much cash at the dealership violated the law by not asking where it came from. In keeping with money laundering laws, any business or bank must ask questions before taking in over $10,000 in cash. If you refuse to answer they are obligated by law to refuse service. Additionally they are obligated to report your refusal to answer as well .

Debra Powell says:

We always pay cash for cars we buy. No one has ever asked us where the money came from.

Jeff says:

Up to how much? I am looking at a $45K car, would it raise any red flags? Just want to know before hand…

I love the idea of paying cash for a car. I don’t know if I’ll ever be able to do it, but I still like the idea! I think the thing that I need to work on is being honest about what I should afford and buy. I just like buying expensive, nice things.

Cory Fischer says:

Dave Ramsey has a plan to help people that are struggling with finances get the car that they’ve always wanted and pay for it with cash. It’s simply to buy a cheep, reliable car with cash and while you save the money you would’ve spent on payments for a year you then sell that car and get a better one. Then simply repeat the pattern until you save enough to buy your dream car with cash.

eric hadden says:

I am getting a settlement here shortly..can I get a truck cheaper than I would if I financed? When I say cheaper..I dont mean finance charges..I mean is the truck gonna have a cash price and a finance price?

Joblo says:

Point #2 is laughably wrong, I grew up in the car industry and it’s quite the opposite for cash customers. Dealers would actually prefer to charge a higher price for cash customers if they could. When customers finance, banks give the dealers a commission called a reserve that is anywhere from $200-$2000. Not only that, it is much easier to sell grossing finance office products like warranties and rust proofing to a finance customer who is looking at a payment bump of $20 instead of the cash price bump of a $1000. Lastly, the car industry has become so cut throat with the advent of the internet and transparency of pricing, most dealers price their cars against other dealers to attract people in for volume car sales rather than a high front end gross. I’ve personally bought thousands of cars of which few have more than $500 profit on the actual car. When you have a big dealership and people to pay, you are actually losing money at $500 profit. We depend solely on finance customers, if we only had cash customers we would be out of business. So when someone says they want a discount because they are paying cash, they are literally putting themselves in the worst negotiating position possible despite their opposite intentions lol.

Jessie says:

Any tips for how to negotiate a price without giving away that you’re paying cash?

Earl says:

Pay partial finance part make sure there is no early pay off penalty.when first payment is due pay it off.

Daniel A. Harris says:

Do you mean: “Pay off the entire remaining balance”????

Ahvamaria says:

Answering a year old comment, but we saved up, went to a dealer, picked out a car, negotiated, price went onto paper, after it was on paper final price we paid cash in a 2 year old car. Everyone’s happy.

Richard says:

Why buy from a scum dealer when there is an endless amount of cars for sale privately. You will get a better price and pay cash and as far as a used cars it’s a gamble if you buy from a deal or privately. Most of those aftermarket warranties are worthless and just a waste of money.

Mark says:

Wrong on 1 and 2. Dealers now charge MORE for cash cars. look on every dealer web site and the price you see will say “Finance Price” . Its Bizaro world. Even on a cheap used car where their vig from the finance company will be pennies. They they add their $800 fee on top of it.

You should get a better price for cash. fact is you don’t any more. But you should still pay cash. It will save you money in the long run.

Charles says:

Maybe in your town, but I’ve seen minimum $500 discounts around Houston for offering cash. That is also NOT what I am seeing online, cheaper prices for financing.

TimJim says:

If I received an award of a $400,000 in back pay and a guaranteed income of $89,000/yr, would I be crazy to pay cash for a brand new $47,000 Cadillac or should I buy one with at least 20,000 miles to avoid the depreciation hit? I mean, it’s not like I can lose a job and income so perhaps the hit won’t be so bad for me, the income is for life.

Daniel says:

That’s entirely up to you on how much money you want to have lost on that car when you sell it.

Raymond says:

You have no idea how hard those 20,000 miles were. If you buy a car that is 2 years old that is 2 less years with a warranty. If you can talk to the original owner and have him be honest on why he is selling it might be worth it.

Anna says:

We are pre retirement and debt free. Pay cash, stay debt free.

Joe says:

If a car is listed at $9800 with 7800 miles and other cars with similar years and are going for less at other dealers, is it unreasonable to get the dealer to come down 2000 if I’m paying cash? Some of these other cars have less miles at the same price point. I feel that could be part of the negotiation.

Margaret says:

If I’m paying cash then why is the car being financed and why can’t I pay it at blue book Value?

Dan Horton says:

I’ve been in the car business over forty years, the last thirty as a dealer principal. A dealer does not have any incentive to discount for cash. All the finance sources (including credit unions) pay us for initiating a contract. We would need to charge a cash customer something extra to make up for the loss of that commission.
The cash discount is a relic from the 1950’s, when there were not finance sources for used cars, All finance contracts were held by the selling dealer. Prior to Regulation Z, most did not itemize a separate interest charge; the interest was built into the price of the car. Unlike a time sale, cash allowed him to reinvest in new inventory, so most dealers happily discounted the interest equivalent. Those days are long gone.

Raymond says:

So you suggest hinting to the salesman that you may need a big loan then dump the cash on the counter once you enter the final room?

Laura says:

Dan, in some states it’s actually illegal to charge the customer a “fee” or an extra charge just because they are paying cash. #slimybusiness

Jeaniecfit says:

I just thought you all would be interested to know that I purchased a 1997 car for cash in 2003. I am now selling that 22 year old car after owning it for 16 years and spending less than $12k on maintenance and upkeep. She still runs great with 115k miles! Unfortunately for the first time in my life I am financing a 2016 used car with a decent cash down payment. I will be done with the payments in five years — a few years ahead of retirement and plan to keep this beauty for at least 15 years if not more. I also plan to pay it off sooner if possible. However as far as financing and purchasing the car, I found the whole process loathsome. I had researched cars for over a year and a half, was pre-approved with a great rate, had done my homework and yet they still got me for a few hundred dollars which makes me so irate. They bundled in the dealer fees, when I clearly could have paid in cash and they calculated the sales tax not on the price of the car, but on the total amount of the finance payments! Bastards.

Joe says:

Best option if you can not afford to pay cash is to finance. If you can afford 500 a month then you.should consider 125 a month. Maintance, tires, and insurance should be factored in. Pay far less than you can afford. Save the rest like you are paying what you can afford. Best deal but a used car. Who cars what you drive as long as it gets you where you need too. We buy used and in cash for everything. I have zero credit because I do not have any debt, nor do I owe anyone.