Buying a new vehicle is a big-ticket item, and in most parts of the country, it's necessary to have at least one car per household to get to work, school, shopping, and more.
For many people, it's just a fact of life that you'll have a car loan, same as you have a mortgage. However, while a house (usually) appreciates, a car starts depreciating the second you drive it off the lot.
Do you really want to take out a loan on an asset that's losing value? But, it's impossible to pay cash for a car, right? Not necessarily. You can make paying for a car with cash one of your financial goals.
Why You Should Pay for a Car with Cash
Stick to Your Budget
It's a lot easier to stick to your total car budget when you're paying cash for the car rather than financing the car. You know exactly how much money you have to spend and how much car you can buy, and you can't go over that amount with cash.
It's easier to not overspend by adding extra accessories to the car when you know that extra $2,000 is coming straight out of your pocket rather than not being spread over years of monthly payments.
Won't Pay Interest
When you pay cash for your car, you avoid paying interest payments on your purchase which reduces the total cost of the car. That same $10,000 vehicle costs less when paid in cash rather than monthly payments with an interest rate added to the monthly cost.
No Monthly Payment
It's pretty obvious that if you pay for your car with cash, you won't have a monthly payment. However, if you run into future financial difficulties due to a job loss, you'll be very happy that you don't have that monthly payment!
Won't be Upside Down on Your Loan
We all know that new car will start to depreciate the second you drive it off the car lot. But, when you pay cash for your car, you don't need to worry about the depreciation as much.
If something happens to your car (like an accident), you don't have to worry that you're upside down on your loan (where you owe more than what your car is worth). Plus, you won't have the added cost of purchasing gap insurance throughout the life of the loan to protect yourself against being upside down.
No Need to Worry about Credit Score
Whether your credit score is good or bad, it doesn't matter when you pay for a car with cash. The dealership will have no need to run a credit check for the transaction.
How to Actually Save the Cash to Pay for a Car
But, unless you are blessed with a cash windfall, you'll need to use these 5 tips to save money to pay cash for a car.
If you have a current car loan, pay it off as quickly as possible
Depending on whether you're doing a debt snowball or paying off the highest interest debt first, start paying extra towards the principal on your auto loan to pay it off more quickly.
Check with the bank to make sure there are no penalties for paying your loan off early.
Pay your old car payment to yourself
Once you have your car paid off, keep making your payment, but transfer it directly into your savings account or money market account to use for your next car. Don't use this money for any other purpose.
When you need to replace your car, use the amount you have in cash as your budget for the car (not as a down payment). If you only have $10,000 saved up, only buy a used car priced at $10,000 or less.
Also check out: 5 Tricks to Save Money when you Buy a Used Car
Reduce expenses or get a second job
If you don't have enough money in your monthly budget to pay cash for a car, consider cutting expenses like cable TV, eating out, coffee, etc. to save more money towards a car purchase.
Or, you could get a second job to earn some extra money for a period of time. Any extra money you stumble into can be added to your car savings to help you get started.
Drive your car until the wheels fall off
My husband and I keep our cars as long as we can until they start needing lots of expensive repairs (that cost more than the value of the car).
We're excited that our cars will last longer in Texas since we no longer have to deal with the Michigan winter road salt and potholes that destroy our cars more quickly.
So, you have the cash saved up for your next car. What are the best ways to use this cash to pay for your car?
How to Actually Do the Cash Transaction
Many car dealerships actually make a cut of both the sale of the car as well as the financial transaction with the finance department when you take out a loan. So, they may not be as excited as you are about you being a cash buyer.
When you visit the car dealership to purchase your car, just tell them that you have your own financing or that you're open to options. That way you can negotiate the price of the vehicle without financing as a factor.
Once, you negotiate the final best price, you'll need to get a cashier's check from your bank account or credit union since most dealerships won't accept personal checks or actual bundles of cash.
If you pay $10,000 or more, you'll likely have to fill out extra paperwork for the IRS.
Be sure to plan for all costs of the vehicle including sale tax, registration, document fees, title fees, and dealer fees to make sure you have enough cash on hand.
If you buy from a private seller, you'll need to work out the payment details with the seller. They likely won't want a personal check either and will either accept actual cash or a cashier's check.
Do you pay cash for your cars? Do you have any tips to share how you do it?
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