Is Paying Cash for a Car a Good Idea?

Is Paying Cash for a Car a Good Idea?

Written by Caitlin Wood
Last Updated December 8, 2021

Paying for a large purchase with cash can be a great idea, you’ll save on interest and you won’t need to deal with making monthly payments for years to come. The same reigns true for purchasing a car or any type of vehicle and there are a lot of people (probably your parents or a few of your friends) who believe that you shouldn’t even consider a new car until you can pay for it outright with cash. 

While we couldn’t agree more, we also don’t think that paying cash is necessarily always the best idea or even always possible for the average Canadian. Cars are a serious expense, one that needs to be budgeted for properly. But they’re also a necessity for most people, as they provide transportation to and from work. Since a new or slightly used reliable car can cost upwards of $10,000, getting a car loan to cover the cost often makes more sense, let’s take a look at why this is. 

Cash Is King 

There are countless better ways to spend your hard-earned cash, including using it to put towards a down payment on a future home or paying off high-interest credit card debt. You should take stock of your life and your finances and invest your cash in whatever you’ll get the greatest return from. If you’re an average Canadian living in a smaller town or outside of a big city, a car is probably an absolute necessity for you, therefore treat it like all your other daily necessities; budget your paycheques accordingly. Having cash available to you at a moment’s notice is important, using it all to purchase a car outright may cause more issues down the line.

Is paying for a car with a credit card a good idea?  

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. 

New vs. Used Cars

Check out if you should get a New Or Used Car.

Things To Consider When Purchasing A Car With Cash

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. 

Pros And Cons Of Paying For A Car With Cash

Pros

  • Simple Process – Unlike a car loan, paying with cash makes the process a lot more simpler. 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’ll be able to sell or trade in your current car without fear of prepayments 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. 

Cons

  • 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.

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. 


Rating of 5/5 based on 2 votes.

Caitlin is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. 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. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

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