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The vast majority of car buyers use an auto loan to finance their purchase, but cash has become more popular in recent years. In the third quarter of 2023, roughly 21% of new car buyers paid with cash instead of using a loan, according to Experian's State of the Automotive Finance Market, up from about 14% in 2021.
If you're thinking about using cash instead of an auto loan, here's what you need to know about the process, as well as the advantages and disadvantages compared to financing a vehicle instead.
Can You Buy a Car With Cash?
Whether you're buying from a dealership or a private seller, you can choose to pay cash instead of financing your vehicle purchase—it doesn't matter whether the car is used or new—as long as you have enough money to cover the sales price and any other costs associated with the purchase.
Before you proceed, however, it's important to understand how the process works and how it can impact your financial situation.
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Pros and Cons of Buying a Car With Cash
There are both benefits and drawbacks to using cash instead of an auto loan. Understanding both sides of the decision and how they relate to your situation can help you determine whether paying cash is the right choice.
Pros
- No monthly payment or interest: If your budget is tight or you simply don't want the burden of another monthly payment, using cash can help preserve your monthly cash flow. Compared to other financing options, auto loans charge relatively low interest rates. But even so, using cash can save you thousands of dollars in interest charges that you would otherwise pay over the life of an auto loan.
- Better chance of staying within your budget: When financing a vehicle, a dealer may try to get you to focus on the monthly payment instead of the sales price—and it's easy to reduce the monthly payment on a more expensive model by giving you a longer loan term. But when you pay with cash, your budget is set, so there's little room for overspending.
- Outright ownership: When you finance a vehicle, the lender holds on to the title until you pay off the auto loan. The lender may also subject you to certain rules, such as requiring you to maintain collision and comprehensive coverage on the vehicle. If you don't want to be beholden to a lender, paying with cash makes you the only owner.
Cons
- Limited selection: Depending on how much cash you have on hand, you may be limited to cheaper used vehicles. That may not be an issue if that's what you're looking for. But if you want a newer, more reliable vehicle, you may not be able to afford it.
- Less cash for other needs: If you deplete your savings to buy a car, a financial emergency could wreak havoc on your financial stability. You also won't have enough cash for other important financial goals, such as saving for a home down payment.
- You could put your money to better use: It can take a while to save up for a car, making it difficult for you to work toward other major financial goals. If auto loan interest rates are low, you may be able to get a better return on your money by investing it or paying down high-interest debt. In other words, you may be able to use an auto loan as financial leverage.
How to Pay Cash for a Car
If you're hoping to buy your next vehicle with cold, hard cash, it's best if you have some time and flexibility. Here are some steps you can take to make the most of your goal.
1. Create a Budget and Save
Unless you have oodles of savings already, create a budget and determine how much you can save each month toward your vehicle purchase.
If you already have an idea of which model you want and the year, you can create a specific savings goal and calculate how long it'll take you to achieve it based on your ability to save. Just remember that you'll also need to account for add-ons, taxes and fees.
Once you get your budget squared away, consider opening a separate savings account so the funds don't get mixed with other savings goals. Be sure to set up automatic transfers to ensure consistent progress.
2. Find a Car and Negotiate the Price
Once you have enough saved up, search local dealerships and classifieds for a model that fits your budget. Then, visit the dealer or reach out to the seller to take it for a test drive and start the negotiation process.
Experts recommend that you avoid telling a dealer that you're planning to pay with cash until after you agree on a sales price. That's because dealers often make money when they arrange financing for a vehicle, and if they know upfront that they won't get that money, they may be less inclined to offer a lower sales price.
If a dealer tries to steer you into discussing monthly payments, you can say you prefer to focus on the sales price, and you're happy to discuss financing with the finance manager.
3. Prepare Your Payment
When you're working with a private seller, they may be willing to accept cash. But dealerships will typically require you to pay with a cashier's check or even a wire transfer. Personal checks are usually not an option because of the possibility that they'll bounce.
Ask the seller about their preferred payment method and the total amount you owe. If you're buying from a dealer, that'll include the sales price, add-ons, fees and sales tax. If you're buying from a private seller, you'll likely pay any fees and sales tax you owe to your local department of motor vehicles, so you'll just need the sales price.
Then, visit your local bank branch to request a cashier's check or initiate a wire transfer—if you have an online-only bank, you can do this step online or over the phone.
4. Complete the Sale
Provide payment for the vehicle and complete all the required paperwork to finalize your purchase and get the keys. At this point, you'll also want to make sure you have insurance set up for the vehicle—even if you don't have a lender, there are minimum requirements for liability coverage in most states, and you may also want other insurance coverages for your new car.
Frequently Asked Questions
Whether you finance a vehicle with an auto loan or pay with cash, you'll likely still have to pay sales tax on the purchase based on the sales price. The only states that don't charge sales tax on vehicles include Alaska, Delaware, Montana, New Hampshire and Oregon.
Because you're not applying for credit, using cash to buy a car won't have any impact on your credit score. At the same time, it doesn't help you build credit over time like an auto loan could.
Yes, paying cash for a car is perfectly safe, as long as you follow the proper steps to make your payment. A cashier's check is often the safest option because it's drawn on the bank's funds. If you lose or misplace it, it's possible to request a stop payment and a new check—though there's typically a fee for this service. In contrast, a wire transfer to the wrong recipient cannot be reversed once they accept it.
Additionally, a cashier's check is made out to the seller, so no one else can cash it. On the flip side, if someone steals your cash, it's gone.
The Bottom Line
Paying cash for a car has its upsides, but there are also some potential drawbacks to consider. Even if your top priority is to avoid debt, carefully consider all of the pros and cons to make a balanced decision for your situation and needs.
As part of that process, check your credit score and credit report to get a full picture of your credit health. Then, research and compare current auto loan interest rates to get an idea of what an auto loan would cost you and whether a low-rate loan would be a better fit.