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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. Paying for a large purchase with cash 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 if it costs upwards of $10,000 or should you get a car loan?

Can You Pay Cash For A Car? 

It may be possible to pay for a car in full upfront if you have access to a lump sum of cash. That said, not everyone will necessarily accept it, particularly dealerships. 

Buyers who show up with a stack of cash look suspicious, and sellers may be skeptical. While there’s nothing illegal about paying in cash, it’s not an ideal form of payment when it comes to buying a new car. 

Sellers may 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.  

You’ll need to find a dealer that is willing to accept cash. That said, even if they do, they may only be comfortable accepting up to a certain amount. Anything above what the dealer is willing to accept in liquid cash may have to be covered some other way, such as a credit card or e-Transfer.

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.

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.  

Benefits Of You 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 You Paying Cash For 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. In general, the cheapest new car will be around $15,000 to $35,000.  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. For example, if you can save approximately $300 each month for your car and you need $12,000. That will take you approximately 3.3 years to save. Even if you were to bump up your savings to $600 a month, that will still take you 1.6 years. 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.

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 a loan can help. If you can responsibly handle a car loan and make regular payments on time then, over time, your credit score will improve.

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. 

Check out what credit score you need to get 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 absolutely never a good idea. So 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 new car, you’ll need to save up at least $15,000, as that’s the going price for some of the cheapest cars available in Canada. For most consumers that’s extremely difficult to achieve, especially if you need the car sooner rather than later. For example, if you need a car in the next year, you’ll need to save $1,250 a month. That is equivalent to many Canadian’s monthly income. On the other hand, if you’re open to a used car, paying cash can be a good way to go. However, your selection on the type of car and the features you want may be limited. 

Is Financing The Right Option For You?

When it’s all said and done and everyone has given you their opinions, it’s you that needs to make the final decision. 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, be sure to adhere to the 20/4/10 rule. It’s a formula on how much you should spend on a car or car loan. According to the rule, you should:

  • Always put down a 20% down payment
  • Repay the car loan in 4 years or less
  • Have car payments that are 10% or less than your monthly income

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.

Looking For More Information On Car Loans? 

Choosing the right lender for your next car loan could mean the difference between saving thousands and spending more than you need to. If you’re currently shopping around for a lender and are looking for more information, get in contact with Loans Canada today, we can help you with all your vehicles financing needs.

Pay Cash For A Car FAQs

Will Your Cash Get You A Reliable Car?

It’s difficult to save up for a large purchase which means you may not have enough to purchase a reliable car. Using your hard-earned cash to purchase an old car that may end up costing you more in future repairs, is not the best idea. You need to consider any and all issues that may arise from purchasing an older and therefore less expensive car, saving on the initial price now could end up costing you way more in the future.

How much should I spend to buy a car?

You don’t want to spend more for a car than what you can comfortably afford. There are a few ways to come up with a maximum price for a car purchase.  For instance, many financial experts suggest spending no more than 10% to 15% of your monthly income on car payments. So, if you earn $6,000 per month, for instance, your monthly car payment limit should be between $600 to $900.

Can I use my debit card to pay for my car?

You may be able to cover your car purchase with your debit card, up to a certain dollar amount. Most financial institutions place a daily limit on how much consumers can spend or withdraw cash using their debit cards.  Considering how expensive cars are, you may find using your debit card may not fully cover the entire ticket price. In this case, you may consider spitting your purchase with another form of payment.

Can I pay for my car with a cheque?

This depends on whether or not the seller accepts a cheque as a form of payment. Generally speaking, sellers don’t like personal cheques. Instead, you may want to consider getting a certified cheque, money order, or cashier’s cheque to pay for your car, as these guarantees that the funds will be available when the cheque is cashed.
Caitlin Wood, BA avatar on Loans Canada
Caitlin Wood, BA

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

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