Considering that the average loan for a new car is $40,927 or $738 monthly, why wouldn’t you want to pay cash if you have the means to avoid financing? According to Bankrate, the average loan for a used car is decidedly lower, $26,248 or $535 monthly. But it’s still a kingly sum.
Pay Now or Pay Later?
Paying cash, avoiding the interest, and driving off in a new or used vehicle might seem logical. After all, who wants monthly or bi-weekly bills when they can wipe out the debt immediately?
Consider these 15 reasons you should never buy a car in cash — even if you can afford to.
Depreciation Hit is Fierce
The average vehicle depreciates a whopping 10% the moment it’s driven off the dealership lot. It depreciates a further 10% to 20% after year one, according to BrokerLink. If your car purchase is an all-cash deal, it’ll be like throwing money out the window.
Depreciation Outpaces Cash Value
It might feel great paying in cash and skipping the monthly payments laden with interest. But if the vehicle depreciates quickly — and it will — that’ll translate into you having less equity with each passing month and year.
Opportunity Loss
Another reason to avoid the urge to pay cash for your next vehicle is so you can put your money to better use if good opportunities rear their pretty heads. If you have $30,000 in cash and are weighing whether to buy a car or take out a loan, consider what makes the best financial sense.
Getting a loan for $30,000 with 3% interest and investing your $30,000 in cash and earning 5% interest makes more sense.
Low-Interest Financing
Many manufacturers entice consumers to visit showrooms and buy cars by offering low-interest financing. Some even go as far as to offer 0% financing. At that rate, you can’t afford not to get a car loan and reserve your cash for other purposes.
Save Funds for a Rainy Day
Everyone needs an emergency or rainy day fund. It should contain three to six months’ worth of expenses. That’s the minimum. If you can save more, that’s even better. If you finance a new car purchase, you can put some cash in your rainy day fund.
Let Inflation Do You a Favor
If you borrow money at a low interest rate in a period of inflation, that borrowed money will lose value. That’ll make getting a car loan even less expensive as you pay it off. This is how to make inflation — something consumers can’t control — work for you.
Reserve Cash for Major Anticipated Expenses
Do you need to change your roofing system, rebuild a vehicle transmission, replace the HVAC unit, or do something else with a high price tag? If so, setting aside some money might be better than using tens of thousands of dollars to buy a car in cash.
Leverage Tax Advantages
Yet another reason to finance a new car purchase rather than pay in cash is to leverage tax advantages. For instance, if you own a business, it may be possible to deduct loan interest. Of course, you should speak to a professional accountant for the specifics. Tax advantages might make financing a new car a no-brainer.
Build Your Credit
A credit score is a number between 300 — poor credit — and 850 — excellent credit. If yours needs work, getting a loan and making payments on time will help. And boosting your credit score will make it easier to get future loans at attractive interest rates.
More Negotiation Leverage
You could score a great deal on a new car if you play your cards right. Car dealerships make more money if you finance a vehicle rather than pay for it in cash. A car salesperson might make concessions and give you a sweeter deal if you say you want to pay in cash. But let them know you’ll consider financing the purchase if the vehicle dealership makes it worthwhile.
Save on Insurance
You might be tempted to get comprehensive insurance at a cost premium if you buy a car in cash. And that’s understandable since you’ll have more to lose should you need to file a claim. Meanwhile, you can get a more flexible and cost-effective premium if you finance instead.
Lower Stress
Can you imagine if you pay for a new car in cash and, soon thereafter, run into an emergency requiring a large sum to fix? You’ll wish you hadn’t used all your money. Maintaining some liquidity is essential so that emergencies aren’t compounded by a lack of available funds.
Take Advantage of Manufacturer Incentives
The car dealership might offer super-low financing deals, while the manufacturer might provide incentives for consumers who finance their purchases. Such offers might make it hard to pass up on a great financing deal — but you might do just that if you’re determined to pay in cash.
Invest in Something That Grows in Value
Do you have enough money to buy a brand-new car in cash? Even if you do, it makes better sense to invest that money in something that increases rather than decreases in value. Whether real estate, index funds, or something else, you could do more with your money.
Better Budgeting
Financing a car will simplify budgeting since your monthly car payments will make expenses predictable. Meanwhile, you will have a financial cushion for expected and unexpected expenses rather than destroying your savings in one fell swoop.
Never Pay in Cash
While the choice is yours, it’s best to finance a new car rather than buy it in cash. You might prefer to avoid monthly payments — and that’s understandable. But these 15 points show that there are benefits to financing a vehicle purchase.
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