Which Is Better: Buying a Car With Cash or a Loan?

profileCarly DeBeikes | May 23, 2022
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Whether you buy a car with cash or with a loan, there are pros and cons to both. The most important factor to consider is your financial situation and whether that situation might change in the future.

Many people choose to buy their car with cash because they can afford to and buying a car with cash ends the process on the spot. A loan, on the other hand, is a longer process, with caveats and possible penalties for missing payments and not being on schedule.

Ultimately, deciding whether it is better to buy a car with cash or a loan depends on the specifics of your personal finances.

No Car Payments and Less Spent

When is it a good idea to buy a car with cash?

Paying the cost of the car upfront means there is no monthly car payment to make. As expensive as an upfront payment is, it can also give you a lot of peace of mind. If you lose your job, for example, or some other expense comes up, it won’t affect the status of your ownership of the car or what you owe on the car since it’s all yours.

And as expensive as it might be to buy the car outright, it means you end up spending less money in the long run. Without monthly payments, there is no interest on the loan because there’s no loan at all.

Dealerships and vendors might push you to take a loan out for a car, but this is because that will primarily benefit them. They stand to make more money from you paying the interest on a loan than if you put down a lump sum to buy the car immediately.

Controlling Your Spending

Buying a car with cash is a great way to have more control over your finances, your budget, and your boundaries. Financial experts recommend paying with cash more often than not because you’re made more aware of parting with your money.

The same applies when you buy a car. It’s a big expense, but you’re less likely to be tempted to finance a better car because you’ll be spending less money per month over a longer period of time.

But again, you end up paying more that way than if you bought the car with cash.

Buying With a Loan: Paying Over Time

On the other hand, when should you buy a car with a loan?

If money is difficult right now, paying a lump sum to own a car might be a bridge too far. Taking out a loan may mean you end up paying more money for the car in the long run, but one big advantage of a loan is that you can spread those payments over time.

So, if you’ve got other expenses you’re dealing with or you’re looking to save money any way you can, a car loan might be preferable to a single cash payment.

Implications for Credit

Dealers prefer to loan cars out, so some of them offer cash discounts to buyers who go that route. If you pay by cash, there’s not much in it for the dealer, so they have no reason to incentivize you. You might be able to find some good rewards or discounts if you take out a loan on your car, and this might even make the loan a wiser option than the cash payment, which offers no discounts or perks.

Buying a car with a loan is more expensive in the long run, but sometimes, it can work out. If you have a good credit score, you might qualify for a low interest rate. This means that even though there will be some interest, it might be so negligibly small for you, that paying by cash doesn’t end up saving you that much money in the long run.

Note that this option heavily favors people with healthy credit. You might qualify for some other programs or discounts that reduce your interest rate, but if you’re not sure about your credit score, you might be better off considering paying for your car with cash.

One of the downsides of paying with cash is that you can’t build any credit off the deal. This might hurt you if you want to take out a loan in the future.

Taking out a loan on a car will temporarily reduce your credit score because of the hard inquiry added to your credit report. But if you’re confident that you can stay on top of the loan payments, that paying the interest on the loan doesn’t place an undue hardship on you, and that your credit score can recover from the hard inquiry, it might be better to buy the car with a loan, with the goal of building your credit for future big purchases.

References

Buying a Car With Cash: Everything You Need to Know. (October 2021). Autotrader.

Should I Pay Cash for a New Car? (April 2020). U.S. News & World Report.

How to Buy a Car With Cash: Everything You Need to Know. (March 2020). Car and Driver.

How to Save for a Car on Any Budget. (June 2021). Current.

What You Should Know About Being a Cash Buyer at a Dealership. (October 2015). Jalopnik.

I Went Into Debt to Buy My New Car Even Though I Could Have Paid Cash, and I Know I Made the Right Choice. (August 2019). Business Insider.

Should I Pay Cash for a New or Used Car? (January 2022). Kelley Blue Book.

Paying Cash for a Car vs. Financing. Allstate.
Does a Car Loan Build Credit? (April 2020). Car and Driver.

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