Looking to buy a new car? Even though it may sound crazy, there are benefits to paying with cash rather than financing. Here’s how to pay cash for a car and reap the rewards.
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What does it mean to pay for a car in cash?
Buying a car with cash means you are not financing the purchase. It doesn’t necessarily mean paying with literal currency. In fact, a dealership may not accept actual cash and instead require a certified or cashier’s check. All it means is that you’re not borrowing any money.
How to pay cash for a car
Paying cash for a vehicle isn’t much different than financing it when it comes to the buying process. The difference is you have more control. Buying a vehicle with cash is easier because you bypass the financing step. Here is what you need to know.
1. Decide what kind of car you want
With any big purchase it is important to know what car you want to buy. Doing your research and choosing a vehicle that is right for you and your budget are critical. For example, it may not be a wise decision to save up and buy a Corvette or a Toyota Supra if you cannot afford the insurance you’ll need.
Another option is buying new from a dealer, or a used car that is a year or two old. A new car loses value the moment it drives off the lot; however, there are usually better warranty options. With a new car, typically there are less worries, but it may not be the best bang for your buck.
A good used car can save you thousands, but you’ll want to run a VIN search to try to ensure there are no problems lurking below the surface. The key here is to research what you want to buy. Make sure you have the funds to cover the purchase, insurance and maintenance.
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2. Save your money
The hardest part of buying a car with cash is the saving part. However, there are many different ways to save. One is to try to save 10% of your monthly income in a different savings account and set it aside for monthly payments, maintenance, insurance and fuel.
A common way to do this is to reduce discretionary spending on non-necessities like takeout and entertainment—cook more meals at home, and opt to rent a movie on-demand rather than going to the theater. Small sacrifices add up over time.
Ensuring you have enough each month to cover the costs of your vehicle is critical to buying with cash. Whatever method you choose, it’s important to have clear goals of how much money you need and when you’ll have it.
3. Shop for your car
Now you know what car you want, where do you buy it? These days there are three main options, and each of these places has different ways of dealing with cash purchases. Let’s take a look at what you need to know.
How to pay cash for a car at a dealership
Dealerships are the hardest places to pay cash for a car. Dealerships make money from financing so paying cash does not incentivize dealers to cut you a deal.
However, if you look at the loan’s interest over time, paying cash can save you money even though you may be paying more up front. Paying cash is also on your terms, not through a financial institution that might be subject to rising interest rates. Once the sale is complete, you own the car free and clear.
Though paying in cash may strip you of your negotiating power, it offers a different advantage: rigidity. You have a certain amount of money, and you are both unwilling and unable to pay more. This is where your research comes in. If you have a solid understanding of a car’s true market value and a dealer won’t offer the car at that price, you know you can find another one who will.
How to pay cash for a car in a private sale
Again, paying cash doesn’t necessarily mean you’ll get a better deal. A seller who’s done their homework will know the value of their car. And even if a seller has outsized expectations, the simplicity of a cash offer is unlikely to sway them from a sky-high asking price.
However, paying in cash can provide an advantage when you’re dealing with a motivated seller. Like buying a house, paying cash cuts out financial intermediaries, closing the sale much faster. If a seller is in a hurry, the convenience of a cash transaction may be worth lowering the sale price a bit.
Look for listings that mention “or best offer” or “OBO.” This usually means that getting rid of the car is the seller’s top priority. Send a courteous message asking them if paying in cash might get you a better deal.
How to pay cash for a car online
Paying cash may be trickier if you find a car through an online marketplace. Most online retailers expect you to finance, but there’s usually an option to pay directly. But again, it probably won’t score you a better deal.
Carvana, for example, partners with a service called Plaid that allows you to link your bank account and wirelessly transfer money. It does not say if there are additional charges or associated fees with ACH transactions, though it’s reasonable to expect that there may be.
There’s typically no negotiating when buying online—the list price is the only price. While this is pitched as a selling point (no more endless negotiations at the dealership), the downside is that they have no incentive to cater to cash buyers.
4. Get it inspected
Vehicles are a big transaction and if you are purchasing a used car, be sure to have it inspected. Sometimes there are used car dealerships that are not 100% honest about where the vehicle came from or if there was past damage.
In addition to a vehicle history report, have the car checked out by a trusted mechanic. Failure to do so risks a drawn-out legal ordeal to get your money back. While some states have lemon laws protecting buyers from dishonest sellers, paying cash means you are out a large sum of money until the matter is resolved.
5. Pay and get paperwork in order
A cashier’s check is typically the safest way to exchange money. It creates a paper trail for the buyer, and ensures the seller that the funds are verified and available. If you take possession of the car and find a problem the seller neglected to mention, you may be able to place a hold on the funds until the issue is resolved. That’s not an option if you opt to pay with physical currency.
Be sure to get a receipt and a bill of sale from the seller. Make sure it includes all taxes, licensing and registration fees, so there are no surprises. Having everything prepared will make insuring and registering the car go much more smoothly.
Pros and cons of paying for a car in cash
If you want to pay cash for a car, you usually can. It isn’t always the best way to negotiate a deal, but it does have some distinct advantages.
Pros of paying cash for a car
Overall, the biggest benefit to buying in cash is that once the deal is closed, it’s over. You own the car outright and are free to do with it whatever you please. There are also other, specific advantages, including:
Even if the dealer won’t budge on the car’s price, paying in cash is still a de facto discount because you are not paying monthly interest. Today’s car loans can stretch to six, seven or even eight years. You’d pay thousands in interest for a financed car over such a long period.
The best benefit of paying cash for a car is you have the power. You are free and clear from payments, contracts or potentially having a credit-destroying repo on your report. That provides a lot of peace of mind, and it also frees up future money for possible future repairs. Having an onerous car payment means many people are one unforeseen accident away from financial ruin. Not having a payment can at least free you of that worry.
No risk of going “underwater”
A financed car is “underwater” when the remaining loan balance exceeds the car’s value. Depending on trade-ins and down payments, your car could lose value as soon as it leaves the dealer’s lot. If you find yourself in a situation where you can no longer afford their payment, you’ll be in a bind because you won’t be able to sell the car for enough money to recover the cost of the loan.
With a car bought with cash, that scenario simply can’t happen. You own it outright. Sure, it’ll eventually be worth less than you paid for it, but you won’t have debt collectors hounding you over the phone.
As we’ve said repeatedly, paying in cash won’t always get you a better deal. But in certain circumstances, it may help. If a dealer is desperate to move cars to make room for new inventory, they may be willing to cut a deal if it means you can have the car off their lot in a matter of minutes.
Develop financial discipline
Saving money is hard. Paying in cash is a great way to learn self-discipline and better budgeting. Financing, though convenient, can open the door to credit issues down the road if you don’t have the knowledge and discipline to live within your means.
Firm budget power
If you have an exact amount you are planning on spending, paying in cash keeps you from paying for unnecessary add-ons or upgrades. Even when a make, model, and price have been decided, dealers will often try to persuade buyers to purchase costly upgrades. Cash buyers don’t have to worry about that because the check is already written.
Cons of paying cash for a car
When you pay cash for a car, you’re likely handing over the most money you’ve ever had up to that point in your life. That’s a hard pill to swallow psychologically, and it also exposes you to other risks.
Not building credit
If you are trying to build credit, paying cash does not help you. Credit is a good way to leverage your spending for future big purchases. To build credit, you have to take out loans and credit cards, and pay them back on time. That doesn’t happen with cash purchases.
No financial safety net
Other than a house, a car is the biggest purchase most people will ever make. Unless you were able to build an unusually large nest egg, paying cash probably means emptying out your savings. That could leave you unable to handle any unforeseen financial hardships.
Saving takes a long time
Again, saving money is hard. Things like housing, energy, education and even food are expensive. For most people, saving enough to buy a car in cash is a months–if not years–long ordeal. That’s a lot of time spent driving an unreliable car, an expensive gas-guzzler or going without a car altogether. For many, that’s not feasible.
No financing deals
Sometimes financing is a good thing. There are incentives from dealers to sell cars at amazing rates. Multiple vehicle manufacturers at different points in the year offer 0% financing options for a set term to attract buyers.
Possibly lower negotiating leverage
Zero-percent deals aside, financing plays a big role in dealer profits. They are incentivized to negotiate the final sale price to win your business. By missing out on collecting interest, dealers may be less inclined to negotiate with cash buyers.
Missed investment opportunities
Do you ever wonder why someone with millions of dollars would lease a car or take out a mortgage on a house they could easily buy in cash many times over? It’s because they know how to take advantage of interest rates, borrowing money when it’s cheap and parking it where it’s profitable. Financing a car can allow you to do the same.
Dealer-finance departments know they’re competing with banks and credit unions. So they often offer exceptionally low interest rates to win business. Instead of blowing all your cash on a car purchase, you might be better off financing it at a low interest rate. Then you’d have the option to put your cash to work in a savings or investment account that offers a higher rate of return than what you’re paying the dealer in interest.
Possible return issues
If your car turns out to be a lemon, you’ll fight a lonely, uphill battle to get recourse if you paid in cash. Because the bank holds the title to a financed vehicle, if the car has problems the financial institution is more likely to help you get out of a bad deal. They want to protect their money, after all.
Should you pay for a car in cash?
If you can do so without putting yourself at risk (e.g., not completely draining your savings), paying cash for a car is fine. If you have a large amount of money saved and are looking to buy a commuter car for less than $10,000, paying cash is easy and low-risk. But if not, you have other options.
Make a bigger down payment
Most people shoot for a down payment of 10 to 20% of a car’s sale price. But if you have plenty of cash saved up, nothing is stopping you from putting down even more and financing the rest. This may offer the best of both worlds. You’ll have the negotiating leverage of a financing customer, but with a monthly payment much smaller than an ordinary buyer.
Finance now, pay the loan off later
If you’re trying to build credit, financing the car may not be a bad idea, even if you can afford to pay in full. Every on-time payment you make is reported to the credit bureaus, and you’re likely to see your score improve in six-month milestones.
You could, in theory, make the minimum monthly payments until your credit score is where you’d like it to be and then pay off the loan’s balance with your cash reserves. The caveat is to read your loan paperwork carefully—sometimes, there are penalties for early repayment.
Frequently Asked Questions
Is it suspicious to buy a car with cash?
Buying a car with cash is not inherently suspicious, especially when using a check or money order. However, withdrawals over $10,000 trigger reporting to the IRS. That doesn’t make buying a car with cash suspicious or illegal, but it may invite government scrutiny to ensure you aren’t laundering money or engaging in other illegal activity.
What is the safest way to pay cash for a car?
The safest way to pay cash for a car is by getting a certified check, cashier’s check or money order. You may be able to buy insurance on these products to protect your hard-earned money. Check with your financial institution for more details.
Should I tell the dealer I'm paying cash?
Yes. If you plan on paying in cash, be up-front about it. That way the vehicle seller (the dealer or other party) knows exactly what to expect from you.