Should I buy a car using cash or financing?

Financing a car might sound like a more expensive option if you have the cash on hand. After all, you’re paying to borrow money that you already have available. However, there are some situations when financing is actually a less expensive choice.

Is it better to buy a car with cash or financing?

Whether you should buy a car with cash or financing depends on your personal situation. If you’re planning on taking out another loan — like a mortgage — buying with cash might be the better option to avoid taking on another sizeable debt, paying interest and increasing your debt-to-income ratio.

On the other hand, financing might actually help you save if you can qualify for a dealership discount or instead invest the money you would have saved up for the car. Financing can also allow you to buy a more expensive car than your savings could cover. Plus, not draining your savings on one purchase means you can keep that nest egg to cover emergencies or other unexpected expenses.

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When to finance a car

Instead of buying a car with cash, there are many cases where you might actually be able to save by financing your car — or at the very least free up that money for something else. Here are a few reasons why you might want to borrow even when you could pay up front.

1. Make money by investing along with financing

Investments often have higher returns than you’ll have to pay towards financing interest rates. Car loan rates tend to be lower than other types of financing that don’t require collateral or allow you to bring on a cosigner. If you can get an APR in the single digits on a car loan, investing you’re savings in a diversified portfolio instead of spending it all on a car loan can often give you at least a double-digit return annually.

Investing your money rather than paying for a car up front might also be appealing because vehicles lose value over time. Investment gains can help offset the depreciation and keep your net worth higher than it would have been if you’d simply bought the car outright.

• How investing can help you save

  Not sure if investing is a good idea? Let’s take a look at a hypothetical example. Say you have cash on hand and are trying to decide if you should pay for your car up front or take out a car loan and invest that money instead.

  You’re looking at a $30,000 car loan on a $37,500 car. You could qualify for a car loan with a five-year term at a 6.5% APR and invest that money in a portfolio with an average return of 15% per year. Since it’s a new car, it’s set to lose 20% of its value in the first year and 10% per year for the next four years.

  Here’s a breakdown of how much you would net by borrowing and investing:

  • Total loan cost: $5,219.07
  • Total investment returns: $30,340.72
  • Net gain: $25,121.65

  After five years, your car would have depreciated by 60% or $22,500. Even factoring in depreciation, you’d still earn a total of $2,621.65 and have a car worth $15,000 and that original $30,000, adding up to a total of $47,621.65.

  In this scenario, you’d have:

  • $17,621.65 more than you’d have if you’d just let that money sit in a no-interest bank account.
  • $40,121.65 more than you’d have if you’d paid that $30,000 in cash.

  Investments are a risk. There’s still a chance you could lose some or even all of that money — and on top of that have to pay off a car loan. But even if you invest in a low-risk option like bonds, the earnings could still put you in a better position over time than if you’d paid in cash.

2. Lower the immediate cost

Another reason you might want to borrow is that you won’t have a car-sized hole in your bank account. Financing allows you to break up something that might cost tens of thousands of dollars into repayments that barely affect your budget. This is particularly worth it if you can qualify for a low interest rate.

You can instead use that extra cash as an emergency fund or for projects that might be more expensive to finance, like home improvements on a new house.

3. Build your credit

Another advantage of getting a car loan is that it can build your credit. If you’ve avoided loans in the past because you’ve paid in cash, it might be a good idea to finance a car to start building your credit history since car loans tend to come with lower rates compared to unsecured loans.

Aside from adding to your record of on-time repayments, auto financing can also diversify the types of credit in your report, which can boost your score overall.

4. Increase your savings

Putting that money toward retirement, your child’s education or even a rainy-day fund could be a better choice than spending it on a new car. That’s because savings accounts and portfolios earn money over time and are relatively easy to access if you need money fast. If buying a new car up front means draining out your emergency fund, financing might be the way to go.

5. Get a better deal on the car’s price at the dealership

Dealerships tend to prefer people to buy a car with financing rather than cash. That’s because salespeople make a commission on your loan if you borrow through the dealership.

They’ll often knock down the price of a vehicle as an incentive to get you to pay with finance instead of cash. Or they might even offer 0% APR financing to borrowers with excellent credit if they need to move cars off the lot — in that case, your loan works more like a payment plan.

How much should I borrow to get a car?

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CarsFast Car Loans CarsFast Car Loans		4.90% - 29.90%	$500 - $75,000	12 - 96 months	Requirements: Min. income of $2,000 /month, 3+ months employed		Go to site More Info	Compare	loading Fetching your data...
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When to buy a car with cash

Paying for a car with cash is generally the safer choice, since there’s no danger of defaulting or going upside down on your loan. Here are a few other reasons why it might make more sense to buy a car with cash instead of with financing.

1. Avoid paying interest or fees

One of the top reasons to buy a car with cash is that you won’t have to pay for financing. If you have bad credit, no credit or can’t find a cosigner, it might be better to pay with cash than finance at high interest rates.

With a credit score under 650 — what most lenders consider to be good credit — you likely won’t get favorable enough rates and terms on a loan to make financing worth it. Even if you invest that money, there’s the risk that you could lose it. Or worse — go upside down on your loan.

2. Frees you up for other loans

Thinking of buying a house soon? Taking out a personal loan? Having an unpaid car loan on your credit report can hurt your chances of getting approved for a competitive rate.

That’s because it increases your credit utilization ratio — how much debt you owe versus how much credit you have access to. It also increases your debt-to-income (DTI) ratio, which tells lenders how much of your income goes toward loan payments each month. Having a high credit utilization ratio or DTI can sometimes even get you rejected for a loan entirely.

3. Opens up more non-APR dealership discounts

Dealerships like to offer discounts on financing to bring customers in. But cash buyers might also be able to qualify for other discounts like cashback deals and rebates. While you might be able to get these with financing — some might even require financing — you might be able to save more by paying in cash depending on the offers.

4. Less of a hassle

Even the most hands-off financing takes time and effort. You have to fill out the application, supply documents and read the contract before signing it. And then there are the repayments. Even if you sign up for autopay, you still have to budget around repayments and keep an eye on your balance until you’ve paid off your loan. If you don’t think it’s worth it, then paying with cash is the simpler way to go.

5. More used car options

Want to buy a used car? If you aren’t interested in buying from a dealership, cash makes private sales a lot easier. Private-party car loans tend to have higher rates than other used car loans. And they can be difficult to come by since many lenders only offer loans for buying a car at a dealership.

How to buy a car with cash

Summary: Should I buy a car with cash or financing?

On one hand, financing a car and making your payments on time can improve your credit score. It also means you don’t have to pay as much up front. But on the other hand, you can save a lot of interest fees if you buy a car outright with cash. To summarize:

Other points to consider

• Is your credit score and income good enough to qualify for financing? If your credit score is low, you may still be able to get auto financing, but it’ll likely come with a high interest rate and less favourable terms.
• Do you have enough cash to buy the kind of car you want? Consider whether you’ll have enough savings after buying a car to pay for any unexpected expenses that may arise.
• Can you afford repayments if you get financing? The convenience of having financing now isn’t worth the hit your lifestyle and credit history will take if you default on your car loan down the road.
• If you get a loan, what will the car be worth after you’ve paid it off? If the value of your paid-off car is the same as, or more than, the interest paid on your car loan, you can get that interest money back by selling your car (if you want to). But, if you car won’t be worth the amount of money you’ll spend on interest, you’ll be suffering a financial loss even if you sell.

Bottom line

Paying for a car with cash might seem like a no-brainer if you’re trying to save money — especially if you’re planning on a big purchase like buying a house in the near future. But taking opting for auto finance and investing that saved money instead could help offset the cost of depreciation. You can read more about how car financing works and compare lenders by reading our guide to car loans here.

Frequently asked questions on buying a car with cash vs. finance

• Can I buy a car with cash and then get financing afterwards?

  Generally no, once you’ve bought the car with cash, you can’t take out a loan to buy that car. However, you can use the car as collateral on a secured personal loan. Since it’s a different type of loan, you might not be able to get the same rates and terms as you would if you would on a car loan.

• When I buy a car that comes with cash back, is that subtracted from the loan amount?

  It can be, though it depends on how you’re paying. Typically, cash buyers get a cheque when they buy a car with a cashback deal or have the cashback directly subtracted from the price of the car. If you’re financing the car, the cashback often goes towards your down payment, which reduces your loan amount.

• Do dealerships prefer cash or finance?

  Generally yes, dealerships prefer customers who plan to finance their vehicles because they can make a commission off of your loan. That’s why it’s important, whether you’re paying with cash or finance, to shop around and know the market value of any car you’re interested in before negotiating at the dealership. If you do plan to finance your car, it’s also a good idea to get preapproval for multiple car loan options, so you know what terms you should be eligible for at the dealership.

• Do I have to sign a loan application if I buy a car with cash?

  No. Since you’re not taking out a loan as a cash buyer, you don’t have to sign a loan application.