The Pros and Cons of Paying Cash for Your New Car

Written by , October 17, 2013

The Pros and Cons of Paying Cash for Your New CarUnless you happen to live and work in a densely populated city, chances are you’ll have to buy a car at some point during your life. In fact, the chances are good that you’ll own at least a half dozen vehicles over the course of your life.

But unlike small purchases that you’ll almost always pay cash for, or very large purchases that you’ll always borrow for (such as buying a new home), you may find yourself faced with a choice of whether to pay cash for your new car or to take out a car loan.

Here are some pros and cons for deciding how to buy your next automobile.

  • No Interest Charges. The biggest pro of paying cash for your new car is that you won’t have to pay any interest charges in connection with the purchase. For individuals who value the lowest absolute cost when they buy something, this can be a particularly strong factor.
  • A Truer Picture of Purchase Price. When you pay cash for your new car you know exactly how much you’re paying. In contrast, when some individuals borrow money to pay for a car they’ll focus on the monthly payment they’re obligated to pay – and whether that monthly amount is affordable – rather than looking at the total amount they’ll pay over the life of the loan.
  • Flexibility on Insurance Coverage. When you borrow money to buy your car, the bank that you got your loan from will have a lien on the car. As such, you’ll be obligated to maintain a certain level of insurance on the car for as long as you have a loan balance outstanding. In contrast, if you own your car outright you’ll be able to choose exactly how much coverage to purchase (subject to the minimum amounts required by your state, of course), and potentially save money by choosing a lesser amount of coverage.
    • Cons:
  • Missing Out on Low Interest Rates. Depending on what’s being offered by auto manufacturers and local dealers, you may be able to borrow money at very low rates when purchasing a car. Even though you’ll be responsible for paying that interest, being able to make payments over time provides you with greater financial opportunities because you can put the cash you would have used to purchase the car to other uses instead.
  • Use Your Cash Towards Other Priorities. If you pay for your car over the course of two or three or five years, you’ll have more money available – money that you would have to buy cash for the car – to build up your emergency savings fund or to pay down any higher interest debt you may have.
  • Greater Selection. If you decide that you want to pay cash for your new automobile, you might find yourself limited in your choices. Depending on your budget, you might only be able to afford to pay cash for a car that doesn’t quite meet your needs or which will require greater maintenance costs over time. Taking out a car loan shouldn’t be used as an excuse to buy the most expensive car possible, of course, but it will give you greater options.
  • Regardless of whether you choose to pay cash for your new car or not, be sure that you don’t over extend yourself financially just to purchase a particular model.

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