Generally, most Canadians use a car loan or an unsecured personal loan to finance their vehicle purchases. However, some people prefer to pay cash for a car, which can be a great idea as you’ll save on interest and you won’t have to go into debt. However, cars are a serious expense, one that needs to be budgeted for properly. Is it worth paying cash for a car, or should you get a car loan?
Key Points
- You can pay cash for a car if you have the amount needed to cover the full purchase price upfront.
- You can also take out a personal loan and use the funds from the loan to shop like a cash buyer.
- Whether you finance your car purchase or pay for it all in cash, make sure you’ve crunched the numbers to determine whether the purchase fits well within your budget.
Can You Pay Cash For A Car?
Yes, you can pay cash for a car in Canada is you have enough funds to cover the ticket price. This may be particularly advantageous when buying from a private seller, as no auto financing arrangements would be required.
Dealerships also accept all-cash transactions. That said, some may be skeptical when buyers show up with a stack of cash to buy a car. They may also sometimes prefer that buyers take out a car loan through their in-house financing program as a way to make money through loan interest.
Some sellers may also prefer to have some paper trail of the transaction. Plus, car dealers may want to have access to buyers’ banking information to verify the legitimacy of the funds and ensure the money isn’t laundered, stolen, or even counterfeit.
How To Pay Cash For A Car
If you prefer to pay cash for a car, whether from a dealer or a private seller, follow these steps:
Step 1. Find A Car
Consider the type of car you want to buy, including its features, how good it is on gas, safety ratings, comfort, and of course, price. You’ll also want to decide whether to buy new or used. New cars come with all the latest features and are less likely to require repairs, but they’re also more expensive and depreciate in value much faster than used cars.
Second-hand vehicles, on the other hand, may be older and more likely to need maintenance, but they’re a lot cheaper and don’t lose their value as quickly. If you’re on a tight budget, buying used may be the best way to go.
Learn more: Should You Buy A Used Or New Car?
Step 2. Negotiate The Price
Whether you buy from a car dealer or a private seller, don’t be afraid to negotiate. There may be a little wiggle room to bring the price down a little, so there’s no harm in trying.
How To Negotiate The Price With A Dealership
If you’re buying from a dealership, don’t tell them that you intend to pay in cash. Dealerships sometimes offer lower prices to buyers using their in-house financing, so keep stringing them along without letting them know that you won’t be using their financing option until you arrive at a price you’re happy with.
How To Negotiate The Price With A Private Seller
If you’re buying from a private seller and you have the cash upfront, let the seller know that you have the financial means to cover the cost of the car in full. They may appreciate working with a buyer that doesn’t have to scrounge to get the funds needed to carry out the transaction. Just make sure you do some homework on the car you’re buying to avoid paying more than what the vehicle is worth.
Step 3. Pay Using Cash
After you’ve settled on a price, you’re ready to exchange the vehicle for cash. While the seller may let you pay cash for a car, consider using a cashier’s cheque or money order instead, as this is considered safer than actual bills. Plus, it gives you and the seller proof of the transaction in case there’s an issue.
You may have to go this route anyway if the seller won’t accept cash over a certain amount.
Using A Personal Loan To Shop Like A Cash Buyer
You don’t necessarily need the funds in your bank account to pay for a car in cash. If you prefer to pay in cash and don’t have enough to cover the full purchase price, you can take out a personal loan, then use the funds from the loan to pay the seller in full upfront.
This may be particularly useful when buying a car from a private seller. In this way, you’ll have the flexibility to finance any car without restrictions. Rather than financing a specific vehicle, you can apply for a loan based on your budget while looking at different options.
You’re free to purchase a vehicle from a dealer or private seller, and you can compare lenders to find the best interest rates and loan terms.
Benefits Of Paying Cash For A Car In Canada
There are several perks to paying cash for a car:
- Simple Process – Unlike a car loan, paying with cash simplifies the process. No credit checks or discussions regarding interest, monthly payments, payment frequency or term is required. You simply pay the dealer and the car is yours.
- Selling Flexibility – When you pay with cash, you own the car title. As such, if you find a new car you want in the future, you can sell or trade in your current car without fear of prepayment fees or early contract break fees.
- Cheaper – Purchasing a car upfront is usually cheaper as you don’t have to pay any fees or interest on the car. Moreover, you may be able to negotiate a better deal since you’re paying with cash.
- Lower Debt – Unlike a car loan, you won’t be increasing the amount of debt you have. Moreover, by paying the entire price now, you’ll have more of your income available for other expenses.
Drawbacks Of Paying Cash For A Car In Canada
Along with the benefits, consider the following drawbacks to using cash to buy a car:
- Cashless – While a car loan takes away a certain amount each month, paying in cash means you’ll be out a few thousand dollars in an instant. Moreover, if you’ve been pouring your savings into purchasing the car, you may not have any left for an emergency fund. This could leave you in a bind, if any unexpected expensive costs come your way.
- Limited Selection – If you’re paying by cash, it’s likely that you’re looking to buy a used car, unless you have thousands of dollars just saved up. Used cars, while cheaper, will have a more limited selection, and you won’t be able to customize the features according to your needs.
- Saving Is Hard – Saving large amounts of money takes a lot of time and dedication. With a car loan, you can get the car you want at any point in time.
- Won’t Help Your Credit Score – Paying cash means you won’t have an opportunity to build your credit. Auto car loans are a great way to build credit as it diversifies your credit profile and adds to your payment history (when payments are made on time).
Things To Consider When You Pay Cash For A Car
When deciding between financing and paying cash, there are a few questions you should be asking yourself.
- What is your credit like?
- Do you have an emergency fund?
- Do you want to buy new or used?
What Is Your Credit Like?
If your credit score is low, then you may want to consider getting a car loan as it will help you work at improving your credit. Cash purchases have no effect on your credit, which in some cases is a good thing. But if you’re looking to improve your credit, then a car loan can help if you make regular payments on time.
What’s even better is you can use some of the cash you’ve been saving to help make your car loan payments while simultaneously improving your credit.
Learn more: What Credit Score Do You Need For A Car Loan?
Do You Have An Emergency Fund?
While purchasing a car with your savings to avoid interest may seem like a good idea, having zero savings is not a good thing. If you need to drain your savings account just to purchase a reliable car, you may want to reconsider your plan. Having an emergency fund that you can live off of for a couple of months or that you can use to cover unexpected costs, like car repairs, is one of the best financial decisions you can make for yourself.
Do You Want to Buy A New Or Used Car?
If you’re looking to buy a car, you’ll need to save up a few thousand dollars. And if you plan to buy new, you’ll need to save up even more.
Right now, the average price for a new car in Canada is over $65,000, And for used cars, the average price is currently over $34,000. For most consumers, these price points are very difficult to save up for, especially if you need the car sooner rather than later. Regardless, buying a used car is certainly much cheaper. So, if money is tight, then used may be the better option. Just remember that your selection on the type of car and the features you want may be limited.
How Much Should You Spend On A Car?
If having cash available to cover unexpected expenses or to use for more costly future investments is important to you, then a car loan is probably your best bet. If you choose to finance your car, you’ll want to make sure your monthly loan payments fit well within your budget.
To help you determine how much to pay for a car, consider the following budgeting rules:
20/4/10 Rule
The 20/4/10 rule is a formula that helps you determine how much you should spend on a car or car loan based on the following:
- 20% Down Payment: Always put down a 20% down payment
- 4-Year Term: Repay the car loan in 4 years or less
- 10% Of Your Monthly Income: Have car payments that are 10% or less than your monthly income.
10% To 15% Rule
Another budgeting strategy to consider is using the 10% to 15% rule. This strategy suggests spending no more than 10% to 15% of your gross monthly income on your car payments. It’s important to use your gross income rather than your net income to give you a broader sense of how much you can afford, but you can also consider your after-tax income to avoid over-stretching your budget.
But if you’ve been able to save enough to pay for a car and still have some cash left over for an emergency fund, then by all means, purchase your car outright. Whichever option you choose, make sure it’s the one that makes the most sense for you and your current financial situation.
Learn more: How Much Car Can I Realistically Afford?
Is Financing The Right Option For You?
Both financing and paying cash for a car can have their perks and drawbacks. Your decision on which route to take depends on your financial situation and goals. Consult the following chart to help you determine whether financing or paying cash for a car makes most sense for you:
| Financing | Paying In Cash | |
| Upfront Cost | Low/moderate (down needed) | High (full purchase price paid upfront) |
| Monthly Payments | Yes | No |
| Interest | Yes (increases the overall car cost) | None required |
| Effect On Credit | -Can build good credit with timely payments-Can negatively affect credit if payments are missed | None |
| Cash Liquidity | Allows savings to be available for other uses or expenses | More money tied up in the car |
| Loan Qualification | Must qualify based on income, debt load, and credit check | Not required |
| Vehicle Ownership | You own it, but the lender holds a lien on title until the loan is fully repaid | You own the vehicle outright |
Final Thoughts
Paying for a car in cash is certainly possible if you have the liquid cash for it. Otherwise, you can finance the purchase. Either way, you’d be well-advised to take some time to do the math to make sure you can comfortably afford this big purchase. And if you choose to finance, be sure to shop around for the right lender that can provide you with the right loan for your needs.
