Is it ever a good idea to pay in cash??

[dczech09]

This is simply not true. Dealers make money on the front end (profit on the sale of the car), and the back end (kick backs from insurance companies, Auto finance institutions, GAP insurance sale, trade in etc).

So a dealer might offer you a great pricing on the car, in the hopes of making a back end commission by getting you to finance with him. I always use this a bargaining chip. Go with the dealer (even if I have a great pre-approval from my own bank), but use the back end to get a steal on the upfront car pricing. Then go ahead and refinance (if the rates offered by the dealer is not competitive). Nowadays auto loans do not have any cost (fees) associated with them.




Again, simply not true. At least not anymore. If you "pay cash" then the dealer loses out on his back end profit opportunity and will be less willing to negotiate a lower price for you. So in general "paying cash" is not a good option for a well qualified (i.e good credit) buyer.

If you agree to finance with the dealer, and use that back end profit in reducing the upfront cost/ purchase price of the car, then it is the best deal. (provided you pay it off immediately or refinance to a new low rate loan).

Interesting stuff. I will have to look into this.

A big question would be how much of a back-end profit do they make in comparison to the discount they could offer you? I am just spit-balling numbers here, but if they make a back end profit of (let's say) $500 and offer you a discount of $250, what if they offer a cash discount of $300.

This where things get very muddy especially since we don't know the numbers that they are working with.

The way I have always understood it (and intuitively it makes sense to me), if you pay cash, you save on a variety of costs that would otherwise be factored into a finance deal. Especially on 0% deals which are not really 0% as they already build the interest into the pricing.

Perhaps it is all circumstantial and there is not really one answer for 100% of cases.

[MKKShah]

Interesting stuff. I will have to look into this.

A big question would be how much of a back-end profit do they make in comparison to the discount they could offer you? I am just spit-balling numbers here, but if they make a back end profit of (let's say) $500 and offer you a discount of $250, what if they offer a cash discount of $300.

This where things get very muddy especially since we don't know the numbers that they are working with.

The way I have always understood it (and intuitively it makes sense to me), if you pay cash, you save on a variety of costs that would otherwise be factored into a finance deal. Especially on 0% deals which are not really 0% as they already build the interest into the pricing.

Perhaps it is all circumstantial and there is not really one answer for 100% of cases.

Whether you pay cash, or finance through your own bank, it's the same to the dealer.

Now if you are financing through the dealer it's a little difference on a new car (and in some cases used certified) vs a used car purchase.

In the case of the new car purchase, almost all financing offers are made by the manufacturers captive finance company, not the dealer himself. The offer comes directly from the manufacturer to you. So "paying cash" to the dealer does not in any way help him lower the price, any more than what it would have been if you were financing with the financing offer. The sale price is set by the dealer. The finance offer is directly from the manufacturer to you (out of their share of the profits). If you don't take the financing offer, you just lose that part.

In the case of a used car purchase, most of the time, a dealer just shops around for loans from financial institutions and then gives you an offer. Usually, this is not the best interest rate. The dealership's finance guy hopes that you will fall for what you think is a good interest rate, while in fact your credit rating will help you qualify for a lower rate. Now, a prime borrower has a sub-prime rate and the dealer takes his cut. You can eliminate all this by getting pre-approved for a loan on your own, and then going to a dealer. Do not disclose your pre-approved offer, and negotiate the price with him. Now when it comes time to signing the papers take his financing offer, and negotiate even more on the price. If he offers GAP insurance, take it. (Make sure it has a 30 day right to cancel). Then negotiate an even lower price. Go home, refinance to a new loan, and remove the GAP insurance. You got the best deal.

Pay cash, and the dealer will not budge.

I do agree that it is all subject to your individual circumstance.

[Eagle]

This has been a very interesting read.

I would venture to say that paying cash for a car ends up being the better deal for the consumer 9 out 10 times. My sister bought a car cash 2-3 years ago and ended up paying significantly less than had she been financing the vehicle. Just saying...

[Eagle]

I think it can make sense to finance if all of the following conditions are met:

- You have a full Stage 2 emergency fund
- You are able to secure a low interest rate on your loan (about 0-2%)

and either:

- The full difference in up-front cost between paying cash and borrowing will be invested for the long-term,

or

- You want the difference in up-front cost available for another big near-term purchase (e.g. other car or home)

Could you please elaborate on this? what is a "stage 2" emergency fund?

I'd imagine Stage 2 emergency fund would be what is considered a fully funded emergency fund with 3-12 months of expenses. I'd probably lean towards 9-12 myself.

Stage 1 emergency fund would be a basic $1000-2000 in the bank or a "baby" emergency fund.

I could be wrong though...