Financing a car might sound more expensive if you have cash on hand. After all, why would you pay to borrow money you already have? But there are situations when financing is less expensive. Let’s walk through whether you should buy car with cash or finance.
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 can help you avoid taking on more debt, paying more interest and weakening your debt-to-income ratio.
On the other hand, financing might actually help you save if you qualify for a dealership discount or successfully invest the money you saved for a car. Financing might also let you buy a more expensive car than you can afford with your savings. Plus, you can keep that nest egg to cover emergencies or unexpected expenses.
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 least free up money for something else. Here are a few reasons why you might want to finance a car even if you can pay up front.
1. You want to invest your savings
Depending on your investment, the returns might exceed interest payments on a car loan. Car loan rates tend to be lower than rates for unsecured and non-cosigned loans. If you get a single-digit APR car loan, investing your savings in a diversified stock of fund portfolio instead of spending it all on a car could yield double-digit returns in the long run.
Investing rather than paying for a car up front might also be appealing, because vehicles lose value over time. Investment gains can help offset this depreciation and keep your net worth higher than if you had dumped your savings onto a vehicle.
Be aware that you can lose money with investments. Returns are not guaranteed.
Say you’re considering buying a $30,000 car. You qualify for a financing with a five-year term and a 7.5% APR. Alternatively, you could invest in a portfolio with an average return of 9% per year (compounded annually). Since the car is new, it’s set to lose 20% of its value in the first year and 10% annually for the next four years.
Here’s how much you would make after five years assuming your investments consistently yield 9% annually:
Investment yield: $16,160
Car loan interest cost: $6,070
Net returns: $10,090
After five years, you would have made over $10,000 and you would own a vehicle worth over $11,000 (after depreciation). Of course, this is a fairly idyllic picture. Investments don’t always perform well. If you lose money, you must still repay your car loan.
Additionally, car loan interest rates have been rising steadily for years. If your portfolio’s average annual returns are lower than your car loan interest rate, you’d be better off buying a car outright.
2. You want to lower the upfront cost of buying a car
Another reason you might want to borrow is to avoid creating a car-sized hole in your bank account. Financing allows you to break up a purchase 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.
3. You want to build your credit
Another advantage of getting a car loan is that it can build your credit. If you’ve paid in cash and avoided loans in the past, financing a car can start building your credit history. This can be advantageous given than car loans often come with lower rates than other forms of debt like unsecured loans.
Aside from establishing a track record of making on-time payments, auto financing can also diversify the types of credit on your report, boosting your score overall.
4. You want to increase your savings
Instead of spending money on a new car, you can use put it towards a retirement fund, your child’s education or a rainy-day fund. Savings accounts earn money over time and are relatively easy to access if you need fast withdrawals. If buying a new car outright means draining your emergency fund, financing might be the way to go.
5. You can get a better deal with dealership financing
Dealerships want customers to buy a car with financing rather than cash. This is because salespeople make a commission on your loan if you borrow through their dealership.
They’ll often knock down the price of a vehicle as an incentive to get you to buy a car with financing instead of cash. They might even offer low-APR financing to borrowers with excellent credit if they need to move cars off the lot.
Buying 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 financing.
1. You want to avoid paying interest and 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 660—what most lenders consider to be good credit—you likely won’t get favorable enough rates and terms to make financing worthwhile. Even if you invest that money, you could lose it or worse; you could go upside down on your loan.
2. You want to qualify for other loans
Thinking of buying a house soon? Want to get 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, which is how much of your available credit you actually use. It also increases your debt-to-income (DTI) ratio, which tells lenders how much debt you have relative to your income. Having a high credit utilization ratio or DTI hurts your chances of getting approved for a loan.
3. You can get dealership deals & 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 some offers require financing, you might find better offers for customers who pay in cash.
4. You want to avoid the hassle of financing
Financing requires filling out an application, providing documents and reading a contract before signing. Then there are the repayments. Even if you sign up for autopay, you still have to budget for repayments and keep an eye on your balance until the loan is paid off. Overall, paying with cash is simpler.
5. You’re buying privately
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. Many lenders only offer loans for cars purchased through dealerships.
Yes. In fact, most dealerships and lenders recommend that you make at least a 20% down payment on the car. A larger down payment lowers your monthly payments and lowers the overall cost of your car loan. It might also make it easier to qualify for a more competitive rate, which can help you save over time.
Bottom line: Should I buy a car with cash or financing?
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 making a big purchase like a house in the near future. Additionally, you won’t have to pay car loan interest or fees.
Financing your car and investing your savings instead might yield more than the cost of a car loan, although you could lose money. Auto financing can also help improve your credit score and reduces the upfront cost of buying a car.
Some dealerships offer special deals for buying a car with cash
Avoid the temptation of “buy now, pay later” and the possibility of getting stuck in a cycle of debt
Pros of financing a car
Spend less upfront to buy a car
Keep your savings for other expenses
Opportunity to establish or improve your credit score
Spread out the cost of your car over time. Doing so might make it easier to pay for modifications or upgrades.
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 might 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? You can recover some or all of the cost of interest by selling your car after paying it off.
FAQs about buying a car with cash vs. finance
Generally no, once you've bought a car in cash, you can't take out a loan to pay for the car. However, you can use the car as collateral on a secured personal loan. But you might not be able to get the same rates and terms as you would if you would on a car loan.
Cash back rebates can be subtracted from your car's purchase price, but it depends on how you're paying. Typically, cash buyers get a cheque when they buy a car with a cashback deal, or the cashback is subtracted from the car's price. If you're financing a car, cashback rewards often go towards your down payment, which reduces your loan amount.
Dealerships usually prefer customers who finance their vehicles, because salespeople can make a commission from your loan. That's why it's important to shop around and know the market value of the car you want before negotiating with a dealership.
Anna Serio is a lead editor at Finder, specializing in consumer and business financing. A trusted lending expert and former certified commercial loan officer, Anna's written and edited more than 1,000 articles on Finder to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in publications like Business Insider, CNBC and Nasdaq, and has appeared on NBC and KADN. Anna holds an MA in Middle Eastern studies from the American University of Beirut and a BA in Creative Writing from Macaulay Honors College at Hunter College, CUNY.
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