You might consider getting a loan when you're ready to buy a car, but there are solid reasons to pay cash for a car. Understandably, not everyone is in a position to write a check and pay for a vehicle outright. However, if you have the financial means to skip the financing process, this is worth consideration. Here are seven incredible reasons to pay cash for a car.
1. You Don't Have to Worry about Your Credit Score
Not having a good credit history is one of many reasons to pay cash for a car. When applying for financing, the bank pulls your credit report. If you’ve had problems in your recent past, this can trigger a loan rejection or a higher auto loan rate. But when you pay cash for a car, credit doesn't matter.
2. You Don't Have to Worry about a Monthly Bill
Getting an auto loan and spreading the payments over four or five years takes the hassle out of buying a car. A car loan, however, is a long-term monthly commitment. Therefore, you need to consider whether you want this monthly bill hanging over your head for the next 60 months. If you pay cash for your car, simply write a check and you’re finished with payments.
3. No Credit Report Inquiry
Even if you have good credit and can qualify for auto financing, applying for an auto loan will trigger a credit report inquiry. And unfortunately, each inquiry reduces your credit score. This isn't a big issue if you rarely apply for financing, but if you're looking to purchase a home in the near future, an inquiry can lower your credit score and possibly have a negative impact on your home loan rate.
4. You Can Avoid Finance Charges
Several factors play a role in your auto loan payment, such as the sale price of the car and the interest rate. Unless you qualify for 0% interest, the bank handling your financing will charge interest on your loan, which is essentially the lender’s fee. Depending on your rate, you could end up paying thousands more for your car. This, however, isn’t the case when you pay cash for a car.
5. Speeds the Sale Process
If you need to apply for auto loan financing, it can take three or four hours to complete an auto purchase. There is a ton of financing paperwork and you might have to provide the lender with various documentations. Buying a car with cash eliminates a lot of the paperwork and can reduce the sale process by half.
6. You’re Able to Maintain a Reasonable DTI
Your debt-to-income ratio is the percentage of your monthly debt payments compared to your monthly income. In a perfect world, your debt-to-income ratio should be no more than 40% to 43% of your income. Stay within this range and it’s easier to qualify for a mortgage and other loans. Since financing a car increases your DTI, exceeding a safe range could make it difficult to buy at house — at least until the car is paid off.
7. Can Pledge Your Car as Collateral
If you ever need a personal loan, most banks will require that you pledge collateral. This can be any valuable personal property that you own outright. Unfortunately, you can’t pledge a car as collateral if a lender holds the title. However, you can pledge the car if it’s paid in full.
Applying for auto financing is a simpler way to handle a car purchase. But if you have cash in the bank, and you can afford to pay for your car outright, this might be a smart move for your wallet and credit.
Do you think it’s smart to pay cash for a car?