Paying cash for a car instead of financing is the best choice for many people. Here are just a few reasons:
1) No car payment
Owning a car is expensive. According to AAA’s recent study, the average cost of owning a car is $8,876 per year. You can lower this number by as much as $5,000 by paying cash for a car and not having a car payment every month. Instead of a $300/month car payment you can save that money or put it towards unexpected expenses such as medical bills.
2) No interest
Customers who finance a car can expect to pay an average of 5.27% annual interest on a 60 month loan according to ValuePenguin. Interest rates can reach as high as 20% for customers with poor credit scores, leading to thousands (sometimes tens of thousands) extra money spent just on interest.
3) Save on insurance
Paying cash for a car and owning it outright gives you the option to carry basic liability coverage for a vehicle. In South Carolina, the average insurance savings for customers carrying liability coverage is $1,036 per year. That doesn’t include the fact that full coverage insurance requires a deductible (usually $500) to be paid before you can use any of the extra insurance. If minor damage needs to be repaired such as a bumper or windshield, it wouldn’t make sense to spend a $500 deductible (and have your insurance rates go up) rather than fix it yourself for cheaper.
When you own the car, no one can tell you what to do with it. You want to sell it? Sell it! You want to paint it, change the wheels, turbo-charge it, go ahead! It’s your car with your name on the title, not the bank’s.
5) Pay less overall
Here is a real example I pulled from a Buy Here Pay Here (financing) dealer’s website for a 2010 Ford Fusion with 125,000 miles. Retail (cash price) value $5,999. Below are the terms of the deal:
Down payment $ 795
Payment amount $ 85
Number of payments 105 (weekly for 24 months)
Extra cost of insurance $ 1,702
Total paid $11,422
Paying cash for this car would save you $5,423!
6) Get more for your trade
If you ever decide to upgrade your car, you’ll have much more leverage at the dealership when you hold the title. Dealerships pay less for trades that have liens because it complicates the process for them. You’ll also be less pressured to take a lowball offer because you don’t have to make a car payment on it this month.