Not too long ago, credit was King. If you couldn’t afford to pay cash for something, you put it on a credit card or financed the item with a loan, and this was the way of the world. Then the bottom dropped out. Banks and major corporations were going bankrupt because they were lending money to anyone and everyone. It took years for the market to rebound, and for banks to finally start lending money again, but we had already gotten used to the air of caution surrounding financing, and we were a little gun shy.
During the recession, more Americans turned to cash purchases and debit card transactions than ever before. We weren’t buying things we couldn’t afford outright because we were scared of the repercussions. As a result, many U.S. residents’ credit scores suffered, because the tricky thing about credit is that you have to use it to get it, and your credit score determines the likelihood of most major purchases. Due to this unfortunate rule, a lot of people found it incredibly difficult to buy a house, or a vehicle without the requisite credit to do so through traditional means. So they turned to cash.
When it comes to the major purchases, there are certain advantages and disadvantages to paying with cash. Traditionally, people don’t have the liquid finances to pay for a house using cash, but a car is a different story. With the right budgeting tactics and careful saving, the cost of a new car is well within the realm of possibility when it comes to cash. While it would certainly take more time than traditional means, it is possible to save enough money in your bank account to buy a car, especially if you have an unexpected windfall, but is it advisable?
There are advantages to paying cash for your new car:
No fees – There’s no interest charges, no outrageous fees, and no finance charges associated with a cash purchase. That means what you see is what you get, and you’re not adding thousands of dollars onto the price of a car.
No Car Payment – While a car payment may seem doable when you’re on top of your game, what happens if something goes wrong. If you lose your job, or you’re forced to move into a more expensive home, you’re stuck with a payment you may not be able to afford. By paying cash, there’s no payment to worry about, and you’re free to drive the car until the doors fall off.
No Insurance Requirements – While it is ill-advised to not carry full-coverage on a brand new car, you don’t have to have it when you own it outright. Should you opt for this decision, your insurance premiums will be much less than if the vehicle was financed.
Savings – Without a car payment in your monthly budget you can save more money, or tuck away another 2% into your 401K at work. You may be able to afford a nice vacation at the end of the year or put a bigger down payment on a nicer home. You have a better shot at developing a real savings account if you’re not shelling out $250-500 every month for your car.
No Credit Checks – If you have less than stellar credit from a previous problem, you’re going to have an insane interest rate attached to your car loan. At this point, paying cash would prohibit such an issue, and save you the embarrassment of having to explain your bad credit.
However, there are also disadvantages:
Depreciation – The loss of value is an unfortunate side effect that comes along with driving a vehicle off the lot. When you pay cash for a car, you’re dropping a great deal of money at one time on a depreciating asset, and you’ll never recoup anything close to what you shelled out.
Price – While it is possible to put yourself into an $18,000 vehicle by paying cash, are you really getting the car you want. So you had your eye on the cute little crossover, but can you afford to drop $25-30K in one fell swoop? Chances are, probably not, because things happen and saving money is hard.
No GAP coverage – When you buy a car outright, there is no GAP coverage offered. If you total the car, you’re not going to get what you paid for it and there’s nothing to back you up. Your insurance company is going to offer the least amount they can to cover the cost of your car, and you stand to lose several thousand dollars in the process.
Credit Will Suffer – Some credit reporting agencies base your score on whether or not you’ve had a car loan recently. If you haven’t, your score may go way down, and prohibit you from getting the best rates on other large purchases.
If you are considering the idea of paying cash for a car, think it over and do your research. You’re going to want to make sure that you’re getting the best possible deal. If you’ve got liquid cash, consider a large down payment, instead of an outright purchase. Weigh your options carefully. While there is no concrete answer as to whether or not it’s a good idea, cash purchase or financing will be a matter of personal discretion.