Five Benefits of Buying a Car With Cash

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My wife and I have recently been in the market for a different set of wheels. Her new job is about 35 miles from our house and our Jeep Liberty is basically throwing money out the window on each trip (due to it’s average MPG of 16.3). We knew that we needed something a bit more fuel efficient.

You probably read our previous post about buying a Mini Cooper, but this purchase never went through. My offer of $8,900 just wasn’t good enough – supposedly the owner had another offer at $9,500. I suggested that he take the deal, because it was more than I was willing to pay.

Recently, we decided to drop the Mini Cooper search and we started looking at VW Beetles. I’ve done my research on the Beetles and they have quite a few things going for them. They get relatively good gas mileage (23 city, 29 highway), they are rated well for dependability, and my 6’8″ frame can actually fit into them quite comfortably!

Just last week, we found ourselves a deal. A 2008 VW Beetle for $8,950. It was the first time I saw a Beetle this new for such a low price. Sure, it had 91,000 miles on it, but it was in pristine condition. My wife and I made the hour drive to the dealership to take a look. The engine sounded good, the transmission felt smooth, and the Carfax report showed no accidents and only one owner. I was ready to flash some cash.

After a quick negotiation, the dealer knocked $50 off the asking price (even though it was already $1,500 below the Kelley Blue Book value), and we drove out of there with an extra vehicle and absolutely no loan paperwork. We are now proud owners of a VW Beetle!

Throughout this whole process, I thought of all the benefits to purchasing a car with cash vs. taking out a loan. As it turns out, I didn’t just think of a couple of benefits of buying a car with cash – I thought of five!

  1. Discounted Price – If you’re buying a car from a small dealership or a private party, they’ll most definitely accept an offer that’s lower than their asking price. Everyone loves cash, and they just don’t know if someone else will come along with a better offer. You are in a great position to get a deal.
  2. No Interest Payments – Even with a low interest rate, my $8,950 purchase would have been over $10,000 if I would have made payments. I’d much rather take the deal at $8,900 with cash.
  3. Increase My Cashflow – When people buy cars on credit, they sign an agreement that says they owe $300 each month for the next 36 months (that would have been the case for this Beetle anyway)! Making that payment each month will severely limit my future choices when it comes to forming my monthly budget.
  4. No Forced Trade-in – Because I have the entire wad of cash to make the vehicle purchase, I’m not forced to trade my car into the dealership for half of its current value. Nope. Instead, I can shine it up and put a post on Craigslist and sell it within 30 days for it’s full value.
  5. Future Flexibility – Since I don’t have an outstanding loan on the car, it will be way easier to sell in the future. Most people don’t want to buy a vehicle that’s still owned by the bank – it just makes the whole purchase process a little more difficult.

What do you think about buying a car with cash? Do you have an argument against it?

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Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

42 Comments

  1. I did this very same thing last July..bought a 2010 Toyota Camry with less than 35,000 miles, for cash. Got a pretty good deal with it, because I bought it from Hertz. It was a former rental vehicle. It’s a great car, I don’t owe payments, my husband’s truck was already paid for. Having that extra money in our budget every month has made a huge difference in our savings!

    I will never finance a car again.
    gharkness recently posted..Preparing an emergency roadside kit

    • That’s awesome! It really is an awesome feeling to own all of your cars outright!

    • Good for you Jai. Living life without payments is an amazing feeling. 🙂

  2. It’s also the cheapest way to buy a car. According to the Bureau of Labor statistics, the second largest expense for the average American is transportation. If you want to lower your budget, focusing on efforts that decrease your car and travel costs are a good place to focus time and energy.
    Wayne @ Young Family Finance recently posted..The Price of Being Organized

    • It sure is the cheapest way! I can’t imagine having car payments for 36+ months. That’s a huge reduction in cash flow!

  3. We are slowly saving up for a new car to us–we don’t want a loan as a) we can’t really afford it and b) I don’t want to give them extra money. Someone suggested that we go and get the car loan and I just looked at them like they were crazy. To me it makes more sense to buy it outright.
    bogofdebt recently posted..Spending Recap 4/2-4/8

    • I wonder what percentage of people have car loans out there. More than 50% I bet!

  4. Congrats on the new car Derek! VWs are usually very reliable cars.

    It would be a massive relief on monthly finances to be able to buy a car with cash. Those monthly payments just weigh you down.
    Modest Money recently posted..My First Childhood Exposure To Gambling

    • Thanks MM! Monthly payment do have a way of weighing people down. Plus, it makes it incredibly difficult to avoid a car payment on the next purchase (since you aren’t able to save much because of the payments).

  5. Good for you guys!! Sounds like you did everything right. I’m terrified that my clunker is going to die on me and I’m not ready to buy another vehicle. I know I SHOULD be saving for one but so far I haven’t been able to. I can only hope to get a car that runs at the cost of about $1,000. And hope it runs for another year or so while i keep working harder.
    Jessica, The Debt Princess recently posted..What NOT to Do: Justify a Bad Purchase

    • If you find any extra cash along the way, sock it away for that car fund! Decide this ahead of time, and I bet you’ll have enough when you truly need that car.

    • I actually expected some rebuttles on this, but it seems that everyone’s agreeing with me thus far!

  6. I honestly can’t think of a negative to buying a car with cash!

    • Glad to hear it! Good luck on your next cash purchase! 🙂

  7. Though your post focuses on a car purchase, you make a great case for saving up for any goal–a vacation, a bathroom renovation, a new washer/dryer–instead of borrowing to pay for it. Even if the financing rate is low, the points you make about flexibility and cash flow would be huge for me.
    Kurt @ Money Counselor recently posted..Beware IRS Form 3949 A

    • You’ve got a great point Kurt! A cash purchase is the right choice for almost anything. Thanks for the comment!

    • That’s the best way to go! Stress-free for sure. 🙂

    • No problem! I’m glad I could help!

  8. I agree with you and I bought my car with cash as well a few years ago.

    That being said, there is an argument against using cash. While you “gain” more cashflow every month, you are losing all that money upfront. There are other things that you can be doing with that money that you can no longer afford if you pay it all in one time.
    Oren recently posted..Joseph A. Bank – 65% off Suits and $50 off a $100 Purchase

    • Ahhh, this was the argument that I was waiting for Oren! Congrats, you are the one to come up with it! I do understand your reasoning because let’s say that the car loan is only 1.9%, but my credit union will pay me 3% interest on my checking account, I would actually benefit by taking out the loan and plunking the rest of my money into my bank account. There are risks that come with this though: 1) perhaps my bank stops paying out a 3% interest rate and changes it to 0.5%. Suddenly, I’m losing money. Maybe I’ll place my money into the stock market, but whoops, the stock market actually went down 20%…. this obviously doesn’t pay. 2) It’s harder to get a deal with credit. You are at the mercy of the dealership because without any money, but you need a car, they can charge a bit more and you’ll most likely be ok with it. 3) Let’s say rough times hit you and you have absolutely no income. If you miss a few car payments, you’re going to lose your car.

      Many times, the cash purchase is just less risky and more likely to benefit your finances in the long run. Thanks for the comment!

      • I would only purchase a car with cash if I took a collateral loan from my Whole Life Insurance policy, so I don’t lose the opportunity cost of my interest rate (most insurance companies have a nice guaranteed rate higher than most banks/CDs, but they take awhile to build up a cash value depending on how it’s set up). Opportunity cost can be devastating for those that are disciplined in their rate of savings. I’m not referring to people that put money in mutual funds, stocks, or other variable products, as those can’t be measured due to their volatility.

        Going my route isn’t an instant decision to make though, obviously it takes pre-planning for big purchases. Not for everyone.

        • Thanks for the comment Brad, but is whole life insurance really the best way to go? Every policy that I’ve looked at just didn’t pay. After all, the insurance company has to be making money from you in order to survive….so typically there’s more money coming out of your pocket than necessary.

          • It’s an efficient way to collateralize a loan against your cash account while still getting interest rate without a lost opportunity cost.

            If you’re looking at the price of a premium as a “cost”, then it will feel very expensive. However I feel that I’m just reallocating my dollars to achieve goals for myself and my family. In my case, my goal was to also have a place for my money to do a few things over the long term:
            -I wanted guarantees
            -Low risk tolerance
            -Safe from creditors
            -Tax deferred growth
            -Tax distributing advantages
            -Maximum benefits (disabled, death)

            It’s just a tool in my box, it’s definitely not the only solution. To achieve what you want, you really have to know how to customize and time the creation of a policy. I find it to be an excellent guaranteed “bank” for myself as a supplement to my spending abilities.

            As far as money to the insurance company – you typically pay most of the cost in the first few years the policy is alive. If you look at a policy with a mutual company the cost per $1000 worth of coverage is extremely small compared to the lifetime of a Term or Universal Life policy. There’s an appropriate time and place for each tool.

          • It’s definitely worth a read. Thanks for the in-depth comments Brad. Sounds like you’ve done your research.

    • That sounds like great advice FS! I like the 1/10 ratio.

  9. And lower insurance costs, lower property taxes, less worries about a big car payment every month!

    • Also some nice benefits to paying with cash! Thanks for the comment Kris!

  10. I have zero arguments as well. We do the same thing with our vehicles – purchase them with cash. We haven’t had a car payment in years.
    Good job, Derek!
    Kevin recently posted..Empower

    • Thanks for the compliments! I think owning cars outright will lead to a much brighter future for my wife and I. We’ll have plenty of options soon, just because we were wise with our money.

  11. This is the way I go. I will never buy a car on credit again. Just a poor way to utilize your money. In my younger days, public transportation was a great option. Now, I live in a place where it simply won’t work partcularly with the kids and their activities.
    BusyExecutiveMoneyBlog recently posted..The Importance of Rebalancing your Portfolio

  12. I am all about buying a car with cash.

    • It really is the best way to go!

        • Very cool! This is exactly how my wife and I buy our cars. Instead of puting the extra money in the mutual fund though, we put it towards out house! 🙂 Pretty soon, we’ll have paid for cars AND a paid for house.

  13. I loved my hubby’s Beetle when we were dating. It drove so smoothly and shifted like a dream (I was used to a beater where the gear stick got stuck quite often). Anyway, Beetle’s are great! Have fun!
    Christa recently posted..Kid’s Recipe: Fruit Skewers

    • I’m pretty sure my wife is loving it so far! Thanks for the comment!


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