Here’s the script for the “Paying Cash For A Car” video above:
There are several different ways of arranging payment for a vehicle. Due to the lack of debt, paying cash for a car can seem like a fascinating option for purchasing a vehicle. For the purpose of this lesson, we’re defining cash as either the actual greenbacks or some type of check or money order. Basically, it means that you’re buying the car without financing in any way, shape, or form.
When I was working on the car lot, I remember that most cash buyers thought that they were actually doing us a favor by paying cash for a car or that they would somehow get a better deal because of it.
The reality is quite the opposite. Dealerships really don’t favor cash buyers in any way because their ability to make money on the deal is limited. They won’t earn any incentives from a bank by setting up your financing, and their ability to upsell backend products becomes far more difficult for them when you have to pay hundreds or thousands upfront extra for coverages, whereas with financing they just have to pitch them as an additional five to ten dollars a month.
The real advantage of paying cash for a car is that you won’t have a payment. No payment equals no debt. After you get all of the paperwork signed, just go to your bank and get a cashier’s check. If you go in this direction, I recommend locking your credit reports and will provide links to do that under this video. A dealership will need your SSN for any cash transaction over to comply with the Patriot Act. They will need to file Form 8300 with the IRS. Yes, even a cashier’s check qualifies as a cash transaction, the only check that doesn’t, oddly enough, is a personal check, but a dealer will definitely pull a credit report before accepting a personal check.
Now we’re going to lock our credit reports to avoid a hard inquiry because even if you tell them you’re paying cash, 90 plus percent of all dealerships will run your credit, even if you tell them not to because they want to pitch a financing offer to you. Industry experts, as well as attorneys from the National Automobile Dealers Association, state that the Patriot Act does not require dealers to run a credit report on customers who pay in cash, so you don’t have to let them do it.
Now there are disadvantages to paying cash for a car. An automobile is a depreciating asset, meaning that its value will fall over time with an immediate drop of what could be a few thousand dollars as soon as you drive it home for the first time. The value of the dollar is going to fall over time as well, meaning that your cash is worth more to you now then it will be in 5 or 6 years. So if you have twenty or thirty grand lying around that you want to use for a car, why not use it to put 20% down on a rental property, which is an appreciating asset and let your tenants make your car payment through rental income? After your car is paid in full, you still have a cash producing asset!
Another option is to look at 0% financing. If the manufacturer offers it, then you’ll usually give up another incentive because they may do something like fifteen hundred cash back or zero percent. Just check the disclosures. The actual purchase price may then end up being a little bit higher, but you have access to free money for the term of the loan, and you will increase your credit score.
I’ve included an auto loan calculator below for you to run different scenarios and see what works best for you. Use it at will. It is only a calculator with outstanding functions. Unlike other calculators online, it doesn’t capture your information or use it to market to you. It is private information for your eyes only. The final disadvantage doesn’t come up frequently but it certainly does happen.
If you buy a car with all cash, because of the steep up-front depreciation, if you total your car within a year or so of ownership, you will likely take a significant loss from the insurance company. On a car where you paid $30,000 for example and say it’s involved in a total loss accident four months later, the insurance company would probably only give you in the neighborhood of $24,000 for it regardless of who is at fault. You just ate $6,000 by paying cash, whereas if you financed it, then you could have added GAP insurance to cover the difference, but we’ll go over that later.