Should I Pay Cash for a New Car? Probably Not.
You have worked hard to save the $20,000 you need to purchase the car of your dreams. You’re ready to step into the dealership, walk straight to the manager in the back, plunk down those greenbacks, and say, “I have cash! Give me your best price!”
This may have worked in the days before electronic banking and factory rebates, but paying cash today will likely cost you more.
Friends and family members often come to me for advice when they’re looking to purchase a car. If they have some money saved up, their first negotiating tactic is to tell the dealer they have cash and are ready to deal. This thought process comes from a time when dealers preferred cash as they received their money right away and didn’t have to send someone to the bank across town to attempt to secure financing.
With the advent of electronic banking and easy access to online loan information, this sneakernet financing task has gone away. Instead, an additional layer of profit has become accessible for the dealer if they persuade a customer to finance their purchase.
In my time selling cars and making friends with other dealers and salespeople, I have seen the cash buyer become a sort of punishment in many showrooms. When buyers bring in cash or a check for a large purchase, the dealer may be required to file additional paperwork for federal and state reporting purposes, taking time away from other sales.
Cash buyers also take finance and accessory profit away from the dealership. In most cases, salespeople are rewarded if they are able to sell financing from one of their partner banks. If they are able to sell an increased interest rate, they can make out even better.
If a buyer is approved for a 2.9% interest rate for a $20,000 car, that buyer will end up paying about $1,500 in interest on a 60 month note. However, if the dealer is able to add 2 points and sell a 4.9% rate, the interest jumps to $2,900. In that case, the bank will usually kick back half of that additional $1,400 profit to the dealer.
The last piece of potential profit for the dealer rears its head in the finance office when the buyer goes in to sign off on the finance paperwork. The finance office is where extended warranties, rust proofing and other added services are usually marketed as small add-ons to the monthly payment in an attempt to get the buyer to sign up.
Knowing about the potential profit for the dealer is helpful to know what you are getting into. However, given the scenario above, financing that $20,000 car still ends up costing you a total of $21,500 after interest. How does knowing where profit is made save you money?
The first portion of the savings comes from knowing the dealer will get a reward from the bank just for financing the sale. If they get $500 back on that $20,000 car, it gives you some negotiation room. You can tell them you’ll pay $19,750 instead of $20,000 and finance with their bank, saving you $250 off the sale price.
The second portion comes from factory rebates. Many current new car deals offer a special interest rate or a factory rebate if you finance through the dealer and, in many cases, this can be thousands of dollars. Some of these rebates are not available for cash or check buyers. However, if you’re financing, you can take the $1,000 factory rebate and bring the price of the $20,000 car down to $18,750. When manufacturers offer special interest rates on certain new cars, you can usually take a rebate instead. In most cases, the rebate will save you more money.
Let’s say you sign up for the loan to get the discounts and you still have that large wad of cash in your pocket. If you keep the 60 month loan, that $18,750 car will end up at $20,160, costing you more money. Instead, once the loan is initiated, request the payoff amount and pay all the money owed. If you wish to stay on good terms with the dealer that sold you the car, you should wait until the 3rd payment is sent in to request the payoff amount. Most of the rewards dealers get are pending until 90 days have passed and if a car is paid off before that window the dealer can lose the reward or commission from the bank.
The interest for 3 payments on our example car adds up to $133. Assuming the car is paid off after the 3rd payment, the total cost ends up at $18,883, saving you $1,117 over paying upfront with cash. Most of the larger banks will not have a pre-payment penalty, so you are fine to pay it off after the 3rd payment without incurring additional cost. Some smaller subprime banks build in an additional fee to cover pre-payment situations. They often call it a deposit and keep a portion of it if the loan is paid off early.
Although it does require a little extra work and may not give the instant gratification of making it rain in the showroom like a nouveau riche rapper, financing for a short time will often save you money and even benefit your credit score in some cases.
Still want to pay cash? Don’t advertise it right away. Cash buyers are becoming known for being … difficult … to work with and many sales managers will be less flexible when they know you have a stack in your pocket.
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