Your options to finance a car are cash or credit, but most people finance a vehicle. Some people pay cash for their new or used car. While dealerships are suspicious of cash buyers, buying a car with cash is legal. Here we look at why cash appears suspicious, the benefits and downfalls of buying a car with cash, and how to responsibly purchase a vehicle with cash.
Reasons Buying a Car With Cash Looks Suspicious
Suspicions of illegal activity
Since most people don’t have enough money in their savings to purchase a car with cash, dealerships assume the money is from an illegal source like money laundering, drug or human trafficking, or other crime-related activities. This assumption leads them to file suspicious activity reports to avoid scammers. While this is sometimes true, not all large sums of money are obtained illegally.
As currency scams become more prevalent, dealerships worry about the money’s source. Scammers have gotten much better at counterfeiting money and often pay with a mix of legitimate and counterfeit bills.
Washing illegal monies through a legitimate business is money laundering. The mafia laundered money for years so they could save it in banks and credit unions. It’s not a stretch that someone would launder money by purchasing an expensive vehicle.
Why dealers don’t like cash transactions
It’s no secret that car dealers have three ways to make money on a new-car purchase. They make money on your trade-in when they resell it. They earn money when you finance the vehicle through a lender, and they make money when they sell a new car to you as the buyer.
If we look at a car loan from the dealer’s perspective, we see that the car loan is through a local bank at 6.5% interest. The car dealer adds a 3% markup that pays the dealer. So you are paying 9.5% interest, the bank gets 6.5%, and the dealer receives 3% of your financed loan. New cars are selling for $50,000 on average, so the dealer gets a good chunk of change!
Now you understand why the car salesman says hello and then asks how you are paying for the car.
Benefits of paying cash for a car
- Cash is king. You have the power in the deal. No business person will let $50,000 in cash walk out the door. You call the shots. If you don’t like the offer, you walk out the door with the money.
- No monthly car payments. The car is paid in full when you drive it off the lot.
- No finance charges. There is no interest or other charges associated with financing your car. That is money in the bank for you!
- The power of leveraging. You can use the cash to negotiate what you want in a car and often get upgrades on a vehicle you couldn’t get if you took out the car loan.
- Staying within your budget. It’s easy staying within your budget when you pay with cash. You can only spend the money in your pocket to buy what you can afford.
The downfalls of paying with cash
- Check the return policy. The return policy may be limited. Ensure your contract allows you to return the car if you pay in cash
- Loss of emergency fund. If you use your savings to pay for the vehicle, you may have no money in case of an emergency
- Lost investment opportunities. You lose the opportunity to invest the money you paid on your car into a better investment opportunity
- Lose out on discounts. You lose out on discounts given to car buyers who finance a loan
- No difference in loan payment vs. paying cash. If you qualify for financing, you could be paying the same or close to the same as a loan
- Can’t build a credit history. Large purchases with cash do not go into your credit history. You are not building a credit history if you don’t have one.
Buying the vehicle with cash
Once you decide to purchase a car using cash, you will need to make sure you get the best possible deal on the vehicle. Use the steps below to ensure you get an excellent deal on the car you buy with cash.
Do not state that you are buying the car with cash!
Step 1: Notify your car insurance company. Contact your insurance company before buying the new car and let them know you are purchasing the vehicle. If you already have insurance, they can switch it to the new car, so you have insurance before driving off the lot. If you need new insurance, you can get things in order and find out what the insurance dealer needs so you can get it to them quickly.
Step 2: Negotiate, negotiate, negotiate! Let the car dealership think you are obtaining a loan. You will be able to negotiate a better price. After you do tell them you are buying with cash, renegotiate a better deal using the cash as your leverage.
Step 3: Payment options for cash. When purchasing a vehicle for more than $10,000, you must fill out IRS form 8300. Instead of bringing money to the dealership, get a cashier’s check. It works like cash but is a safer option. Keep your banking information secure and private.
Step 4: Wrap up the paperwork. The paperwork is the same whether you purchase the vehicle through a dealership or private sale. You’ll need to take care of the registration, taxes, and tags. If you buy the car through a dealer, they will file the paperwork on your behalf. You are responsible for getting the paperwork to the proper places if it is a private sale. The local DMV can help you register the car and get the tags.
Step 5: Drive away in a new car. Once the dealership gives you a bill of sale, the car title, and an emission certification, you can drive that new car home. Once again, these are your responsibility if you make a private sale.
Avoid being scammed
Here are a few things to watch for so you are not taken advantage of in the cash buying process.
1: Scammers. Be on the watch for scams. If it doesn’t feel right, follow your instincts. Always research dealerships before going to buy a car. Make sure they have a good reputation. Check their reviews. If they did something sketchy, there would be negative reviews. Don’t give anyone cash unless you know they are legitimate! Get it in writing…no one is selling you a car worth $30,000 for $20,000. Skip the too good to true and go somewhere more reputable.
2: Know the value of the car. If trading your existing vehicle for a newer one, look up the trade-in value for your car on Kelly blue book. They also offer excellent advice on buying a car with cash. Knowing the blue book value on your vehicle will help you negotiate the best trade-in value.
3: Consider all car expenses. Include your insurance, car maintenance, gas, and repair costs into the final car price. It can make a difference when deciding on cash vs. financing. Take advantage of online tools that can help you with the calculations.
4: Use a reputable dealership. Ensure the dealer you chose has a history of being fair and has a solid reputation. At no point in the process should you feel like someone is taking advantage of you!
5: Dishonest sellers. Don’t buy any car unless the seller has a title. You can pay the seller; if he has the title, he will remain the owner and have your money too! Use Carfax to look up the car’s history and download the report to protect yourself against fraud.