Buying A Used Car? 3 Reasons Not To Pay Cash

Unless you have unusual quantities of cash lying around, the purchase of a brand new car is always going to require getting a loan. But what about a used car? Many people can handle paying for a used car in cash. In fact, if you're buying a used car from a private seller, cash is probably the best way to handle the deal. However, if you're buying a used car from a dealership, it may be smarter to take out a loan, even if you can afford to shell out the cash. Take a look at a few reasons why paying cash for a used car isn't always the best way to close the deal.

Paying Cash Won't Build Your Credit Score

Many people understandably believe that paying in cash upfront is the responsible thing to do. If you can't pay cash, don't buy it, right? And from a purely fiscal point of view, that may be true. But that viewpoint doesn't take into account your credit score and the way the financial system works.

Paying for a car in cash certainly won't do anything to harm your credit score, but it won't do anything to help it, either. No credit is not quite the same as bad credit, but it's still unhelpful. What you want is good credit. If you ever want to buy a new car – something that will usually require a loan – or take out some other kind of loan, the lender will want to see that you have a history of paying off your debts. And you can't establish that history without accruing some debt first.

If you can afford to pay for a used car in cash, you can also afford to put that money aside, take out a loan, and make your loan payments on time, establishing a good credit record for yourself. Auto loans are among the most accessible types of loan, so taking one out now can help establish the credit you'll need to score a low interest rate on a less accessible type of loan later on.

Paying Cash Won't Help You Negotiate

If you've ever bought a car from a private seller or sold a car yourself, it's understandable that you'd believe that cash on hand would be a good negotiating tool. After all, who wouldn't want all their money upfront?

Well, one person who doesn't want all the money up front is a dealer who gets a commission from a loan that they facilitate for you. This is called the dealer reserve, and it's quite common. To simplify it, imagine that you're waiting for approval on a loan through the dealership. The dealer will communicate your information to a lender and the lender will offer you a loan at, for example, 2% interest. But your loan contract will specify that you will be paying 3% interest. Where does the extra percentage point go? To the dealer. This is their commission for selling you on the loan in the first place.

The dealer will make more from that extra percentage on the loan than they will if you pay for the car up front in cash, and that means that they'll be more willing to come down on the price if they know they're going to profit on the lender's end as well as on your end.

Paying Cash May Tie Up Too Much of Your Money

For many people, a car is not a luxury, it's a necessity. You may have to buy a car in order to work or conduct business. But you don't have to tie up all your money in it. If paying for the car (plus all the other fees, like inspections, insurance, tags, and title) is going to use up all or most of your savings, then paying cash is not the smartest financial choice.

What would happen if you encountered a job loss, health issue, or other financial difficulty before you had a chance to replenish your savings? You might have a car, but you wouldn't have a safety net. If you need a car and can't pay in cash without emptying your bank account, you shouldn't pay in cash. You should go ahead and get the loan for your own safety. You'll still have to pay a down payment and other fees, but this should leave you with a reasonable rainy day fund.

A good dealership will work with you to find a car and a payment plan that suits your needs. Take your time and keep an open mind about the best methods of financing your next used car. For more information, check out sites like