How To Buy A Car With Cash: A Complete Guide

Most Americans finance their car purchases. But what if, instead of taking out a loan, you buy your next car with cash? For some, this may be the better choice. However, the process of buying a car with cash is slightly different, so in this article, we’ll explain what to do and consider.

How To Pay Cash For A Car In 5 Steps

Paying cash for a car involves the following steps:

1. Decide What Kind Of Car You Need

First, you must choose a car to buy. Start by setting a budget based on how much money you can reasonably spend on one. Then consider your driving needs and lifestyle. For example, do you need a car to commute to work every day or mainly for running family errands?

From there, you can start researching car models that fit your budget and driving needs. For instance, a car that gets good gas mileage may make a great commuter car, while a minivan with many seats may be best for transporting kids.

If buying a used car, you’ll also want to inspect its condition. Take it for a test drive and look for signs of wear and tear, mechanical issues, and any other potential red flags. Have a professional mechanic look, too, just to be safe.

2. Prepare To Pay With A Cashier’s Check

Most car dealers and private sellers won’t accept physical cash or personal checks as payment. Instead, they usually want a cashier’s check. To get one, you must request it from a bank or credit union. They’ll have you deposit the desired amount and then issue a check from their own funds. Since the money is coming directly from the financial institution, the check won’t bounce and will clear sooner (typically by the next business day), which is why car sellers prefer it.

Furthermore, the Internal Revenue Service (IRS) requires car dealers to report the receipt of cash or cash equivalents for purchases over $10,000, and a cashier’s check makes that easier.

3. Negotiate The Cost Of The Car

Before you pay for a new car, negotiate the price. Start by researching the car’s market value on sites like Kelley Blue Book or Edmunds. While a dealer might want to sell the car for its manufacturer's suggested retail price (MSRP) or more, the market value reflects the average price others are paying for the same or comparable vehicle.

When negotiating, focus on the car’s “out-the-door” price — the total price of the car including any taxes and fees. That way, you avoid getting caught up in what the monthly payment could be if you financed the car (a common tactic by car salespeople because it can hide the long-term cost of the vehicle once you factor in interest).

Finally, don’t be afraid to walk away from the deal. If the seller won’t offer a price near the car’s market value, consider taking your business elsewhere. However, if it’s close enough and you don’t want to prolong your car search, accepting the offer could be best.

4. Pay And Pick Up The Car

To finalize the car purchase, complete the necessary paperwork. When buying from a private seller, this involves signing a bill of sale and title transfer. You’ll also need to register the car with the Department of Motor Vehicles (DMV) to obtain license plates and tags.

A dealer will have you sign a sales contract in addition to documents authorizing them to handle the title transfer and vehicle registration on your behalf. Then once you’ve signed on the dotted line and handed over the cashier’s, you can schedule a time to pick up the car.

5. Insure Your Car

Nearly every state requires drivers to get minimum liability car insurance. This can protect you financially and provide compensation to others if you cause an accident.

To get the best policy, shop around and compare quotes from different insurance companies. Make sure you understand the policy terms (for example, the deductible and premium amounts) and what is covered (liability, damage, injuries, etc.).

Should I Finance A Car Or Pay Cash?

Buying a car with cash has many benefits. For one, you won’t be stuck with a monthly payment and you’ll pay less in the long run because you won’t owe interest. But financing a new vehicle has its own advantages, such as keeping more cash on hand and expanding your car options.  

When Not To Buy A Car With Cash

Here are some potential situations when you may not want to buy a car with cash:

• You can get a great deal by financing. For example, if you can get a car loan with an interest rate lower than the return rate on a potential investment (for example, 4% on the car loan vs. 7% in the stock market), financing may have a relative advantage. While it’ll cost in interest, it’ll also free up cash to invest where the returns make up for the cost and more.
• A car loan will boost your credit score. If you have limited or no credit history, making timely car payments can improve your credit score, helping you qualify for future loans with favorable terms.
• You’ll lose your emergency fund. Most experts recommend keeping an emergency fund that covers 3 – 6 months of expenses. If buying with cash forces you to deplete your savings, it could hurt your financial stability and make financing the better option.

Things To Consider When Buying A Car With Cash

Whether you ultimately buy a car with cash or not, consider the pros and cons:

Pros

• No debt. This can minimize your liabilities and help you maintain a low debt-to-income (DTI) ratio to help you secure future loans.
• Own the car outright. This can provide peace of mind since you won’t need to worry about making monthly payments.
• Negotiation power. By offering to pay the full cost upfront, you can often get the seller to lower the price. This is because cash offers are less likely to fall through and tend to lead to a faster sale.
• No interest payments. Interest can add thousands of dollars to the final cost of a vehicle.

Cons

• Reduced cash reserves. This can leave you with less money for emergencies and other financial priorities.
• Missed investment opportunities. By paying in cash, you could miss out on potential investment gains from other more lucrative opportunities. 
• Lack of credit building. You won’t improve your credit score or your ability to qualify for future loans with favorable terms.
• Limited car selection. Your car selection will be limited to whatever you can buy outright, whereas financing could expand your options.
• Potential for higher sales price. Some dealers prefer financing deals and may charge a higher sales price to cash buyers as a result.

The Bottom Line: Paying Cash For A Car May Be A Great Investment

In the end, buying a car with cash is a viable option for those who prefer to limit their debt and own their car outright. Before making a decision, however, weigh the pros and cons carefully.

Whatever you do, be sure to manage your finances responsibly. Need help? Sign up for the Rocket Money℠ app today! It can help you track your spending, lower your bills, and more.