If you are buying a vehicle from a private seller, you might be more likely to get the price you want if you bring cash to close the deal. However, if you are getting a car from a dealership, cash isn’t always king.
Many times I’ve heard this from car buyers: “ I don’t know why the dealer wouldn’t accept my offer. I was paying cash!”
Unlike private sellers, most dealers would prefer you to get a loan for your purchase. Often dealers make a little bit of money of the loan that they give you. This is known as “dealer reserve” and it works basically like this: you get approved for a 60 month loan 2.5 percent, the dealer tells you that you were approved at 3.5 percent. If you accept the the 3.5 percent loan the dealer pockets the difference. This is all perfectly legal and very common.
If you bring in outside financing, whether it’s your own money or a check from an outside source like a credit union, the dealer loses that opportunity to make the reserve. In addition, cash buyers usually get to bypass all those finance and insurance spiels about how you need to “protect your investment” with an extended warranty, service plan or any other add-ons. These products bring a lot of profit to the dealers, so if they know right away they can’t make any money off you from F&I, they may be less likely to cut a good deal on the car itself.
Most buyers who are paying with cash are not rolling into the dealership with a suitcase full of wrapped bills, but some choose to use their savings and pay for a car in one lump sum rather than take a loan. However, most dealerships consider you a “cash buyer” if you are using a payment method not financed at the dealer. A common example is someone who uses a check from their bank or credit union.
If you’re paying for your car with your own money, usually the best bet is to get a bank check also known as a cashier’s check. Many dealers will not accept personal checks as they don’t want to take the risk of a personal check bouncing after you drive off with your car. Before you take delivery of your vehicle, I recommend speaking with a manager at the dealership to see what payment method would work best.
Recently I described some warning signs of a shady car dealer and mentioned that there are basically two kinds of stores: those that only care about taking every dime you have regardless of whether you return, and those that understand the long game of a fair deal and good customer satisfaction.
While some dealers aren’t so welcoming to cash buyers, a smart dealer knows that if these customers are treated right it will often mean a quick sale and a better likelihood of good survey scores. Also, if a dealer knows they have a cash buyer they don’t have to worry about the deal falling through because the customer didn’t qualify for a loan. One of the worst scenarios for a salesperson is to spend hours working a deal only to have it unravel in the finance office. If you’re shopping at a dealer that serves a lot of “credit challenged” customers, they may be relieved to have someone that has the money ready to go.
The question that I get frequently from car buyers is - “Should I tell the dealer that I’m paying in cash?”
I used to tell people to just focus on the price of the car and not disclose the fact that you are a cash buyer until the last minute. However, since some incentives and discounts are tied to financing, such as a zero percent interest loan or a rebate scenario, I’ve adjusted my advice.
If a dealer asks how you are going to be paying for the car, try the following - “I will most likely use my own financing, but I would be open to other other options if they are favorable. However, give me price quotes that are based on a cash deal.”
Unless you have boatloads of cash lying around, sooner or later you are going to have to play the credit game. For most people, there will be several times when they have to borrow money to make a purchase. If you play the credit game wrong and get in over your head with debt, you can be in for some financial trouble. On the other hand, you can also get into a tough spot by opting not to play at all.
Some people seem to think that no debt equals good credit. The reality is that no-debt will not bring down your score, but it won’t improve it either.
Without getting too deep into how exactly your FICO score is calculated, remember that your credit worthiness is basically your ability to borrow money and pay it back. The better your track record with taking out loans and making payments on time, the better your score will be. While an automotive purchase with cash does not have a direct negative impact on your score, not taking any auto loans can make it difficult when you actually need one.
Not long ago, I had a customer in his 40s who only bought used cars in the $8,000-$10,000 range with cash. He did this for a long time and then decided to purchase a new car, because he had no history of regular payments on an auto loan, he could not qualify for a low interest rate. He had the ability to borrow money earlier in life and pay it back, but chose not to thinking that paying in full was the more responsible move and it probably was from a purely financial perspective. However, it seems that the lending agencies penalize you later for not taking those loans out.
If you absolutely hate the idea of having car payments, then by all means drop down the cash and drive away free and clear. But with many automakers offering zero percent financing or really low interest loans, you may not want all your money tied up in one place. Instead of pulling thousands of dollars from your bank account, if you can take advantage of cheap financing, that money might be better used for things like an emergency fund, investments, home projects, or paying down other debt that carries a much higher interest rate.
Also, some dealers will offer extra discounts if you finance through them. In these scenarios the interest rates aren’t always the best, but you can take advantage of the discount then make a lump-sum principal payment and wipe out the loan.
For example, I had a client who was going to purchase a new Toyota Camry and pay it off in full. The dealership offered an additional $2,000 discount to take one of their loans, at a not so great 4.5 percent APR. However, because his state has no pre-payment penalty for auto loans, he took the loan, got the discount, made payments for two months, then wrote a check for the balance of the car.
The loan was wiped out and he saved two grand on his car. Of course, this strategy only works if you have the cash to pay in full and your state does not have prepayment penalties. You don’t want to be stuck with a higher interest loan in the long run especially if you can qualify for something better.
Whether you are paying with money you have saved up or walking in with a check from your credit union, being a “cash buyer” can give you an edge at the dealership. Just be sure to examine all the angles to see what financial option is most beneficial for your purchase.
If you have a question, a tip, or something you would like to to share about car-buying, drop me a line at AutomatchConsulting@gmail.com and be sure to include your Kinja handle.