Ask Kelley Blue Book: Should I Pay Cash for a New Car or Used Car?

Times are tough for the new car market, but used cars are not exempt from the problems. When it comes down to buying a new car or used car, is it worth it to pay cash? Is a loan a better idea? Kelley Blue Book has some useful tips to help buyers make the right decision.

Kelley Blue Book says delaerships prefer financing for new and used cars

Kelley Blue Book on paying cash for a new car or used car
Used cars and relatively new cars sit at a car dealership | Pablo Monsalve/VIEWpress via Getty Images

According to Kelley Blue Book, there is a reason dealerships prefer financing over cash. In some cases, it can be a lost opportunity to make money on extras. These can include accessories or extended warranties that might offer the salesperson a commission.

If a cash buyer is able to negotiate the price of a car down, it is less likely that accessories or other extras will make a significant change in the price. In many cases, that means the buyer won’t add more on. In the case of financing, extras and accessories would only increase the monthly payment by a little bit. Kelley Blue Book says that a dealership generally makes around 1% of the loan’s value. That would be around $300 commission on a $30,000 loan.

However, there are still plenty of good reasons to pay cash for a new car or used car.

Pros for paying cash for a new car or used car

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  • No interest payment! By not paying interest on your loan, you can save thousands of dollards when buying a car cash. Kelley Blue Book says that you could save $5,200 on interest if you purchase a car that costs $47,077 (the average price of a new automobile lately) in Florida with a $3,000 down payment and 6% sales tax over a loan term of 60 months.
  • You only spend what you can afford. If you only have a certain amount of money, you can’t spend more than that. A cashier’s check is a good idea for any vehicle over $10,000.
  • Buying your new vehicle with cash means it is yours. You don’t accrue any extra debt from the purchase and your other cash is freed up for other things.

Some of the cons for paying cash for your new car

  • The seleciton might be more limited. If you want to pay cash for your new car, you are limited to what is available at that time. If you are looking for a particular style of car such as truck or minivan, you might not be able to get exactly what you were looking for. A long would give you the chance to find a better vehicle from a larger selection.
  • A certain brand might offer buyers a low-interest rate. Sometimes, automakers want to move vehciles off the lot which will beenfit the buyer. Dealerships can offer a low or even sometimes no-interest rate if the buyer financies through the automaker. This could be a good opprunity for a better deal.
  • If you decide to pay cash for a used vehicle, be prepared for repairs and maintenance. Setting aside cash ahead of time can be helpful in an emergency situation.
  • Some buyers don’t have enouhg money laying around to purchase a car. If the buyer is living paycheck to paycheck, it might not be feasible to outright buy a car. Some people have a retirement fund or some money set aside for emergencies, it is probably not a good idea to use that unless totally necessary.
  • If you are trying to build your credit history, paying cash won’t benefit that aspect. If you want to be able to buy a home or something down the line, having credit and a history of good payments is important.

It is ultimately up to the buyer

Only you know your finances and can determine which route is best. Buying a car with cash has some benefits, but these don’t make sense for everyone. Making a pro and con list of your own can help weigh out the right decision.

Buying a car with cash can allow the buyers to pay off other debts without a car payment. However, if you want to improve your credit, a car loan is an easy way to do it. Making consistent on-time payments will improve your credit score over time. You might be able to secure a lower price by paying cash, but that’s not always the case. Sometimes the dealer can offer you a better deal with a loan.

Check out your insurance policies and options before settling either way. Knowing how much your vehicle insurance will cost is an important factor. Sometimes, a newer car will cost less due to updated safety technology.

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