Why Paying Cash at Car Dealerships Can Be a Costly Mistake 2024

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Paying Cash at Car Dealerships

Buying a car in cash versus financing a car with a loan, which is the smarter option that saves you the most money? That’s what we’re going to find out.

Now, if you’ve been doing your research on how to buy a car from a dealership, you’ve probably come across all kinds of articles, videos, and news including those that claim all kinds of tricks and tips like, don’t pay cash for the car or don’t tell the dealer that you’re paying cash in order to get you the best deal and save you money.

I’m going to give you my take on this subject and tell you which option, whether it’s paying cash or financing a car with a loan, is going to save you the most money and get you the best deal on your car purchase.

The bottom line is that I typically advise Everyone to take the financing option versus paying cash, especially when really strong financing incentives are available on the car you’re buying.

Benefits of Financing

Now, if you find 0% financing or even a super low rate financing available on the car you’re buying, I strongly recommend taking that option versus paying for the car in cash, and here’s why.

0% financing is essentially a free loan that allows you to pay for the car little by little over a period of, say, 4-5 years.

And in the end, it won’t cost any more than if you were to just buy the car in cash.

The major advantage to this and why financing often makes more sense than paying cash is that you can save the bulk of your money and invest it elsewhere, somewhere where you can get your money working for you and make you money, as opposed to spending it on a depreciating asset, which is basically what a car is.

Investment Opportunities

If you finance your new car purchase at 0% interest, you can take the bulk of the money that you would have spent paying for it in cash and instead invest it in some investment, such as an S&P 500 Index fund, a low-risk mutual fund, or some other type of investment that’s going to gain you interest and make you money over the period of the 4-5 year financing term.

If you invest your money in this way, by the time your car is paid off after 4 in five years, you’ll have spent nothing on interest on the car loan, but at the same time, you’ll have made money on interest from the money you would have wasted buying that car in cash.

Now, the only issue with this option is that zero % or low interest rate financing is not always available every new car.

Certain new cars and most used cars are not available with low rate financing and instead need to be financed at the standard interest rates, which are typically somewhere between four and a half and six and a half %, depending on the car company or the lender.

When Cash Might Be Better

Now, If you’re faced with a financing rate of, say, 5 to 6%, then the cost of borrowing for that car can now inflate by a few thousand dollars.

So it might make you want to rethink whether you should be financing that car or paying cash for it.

Yes, you can still use that strategy of financing the and investing your money elsewhere, but that strategy might not pain out in the end in this case because your investments will now need to exceed the cost of borrowing on your car loan with that 5 or 6% interest rate.

So if you’re faced with a situation where the only option is to finance the car with an interest rate of, say, 5% or higher, then it may make sense for you to buy the car in cash and save yourself that interest.

Strategic Financing

If you still prefer to finance the car, then make sure that your car loan is no longer than 3 to 4 years so that you can pay the car off as soon as possible and minimize the amount of money that you spend on interest.

Remember, a car is a depreciating asset, which means that it decreases in value over time.

That’s why it makes sense to pay it off as soon as possible, ideally within three to four years, to not only minimize the amount of money you spend on interest, but also get yourself in a position where you’re ready to move into a new car if necessary.

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