Should I buy a used car with cash or finance it?
Cash purchase pros and cons
Paying cash means no monthly payments, no interest charges, and you own the car outright. You may also have more negotiating power since you're not reliant on dealer financing. However, it ties up a large sum that could be used for emergencies or investments.
If you have the cash but it would drain your savings, financing part of the purchase might be safer. Aim to keep at least three to six months of living expenses in reserve.
Financing considerations
Financing can be a good option if you qualify for a low interest rate, especially if that rate is lower than what you could earn by investing your cash. But watch out for long loan terms that keep you upside-down (owing more than the car is worth) for years.
Dealer financing often comes with higher rates than banks or credit unions. Get preapproved by a lender before you shop so you can compare offers and negotiate the price separately from the financing.
- Check your credit score first.
- Compare rates from banks, credit unions, and online lenders.
- Avoid loans longer than 60 months if possible.
- Make a down payment of at least 20% to reduce negative equity.
- Read the fine print for prepayment penalties or add-ons.
Common mistakes
- Thinking you must finance through the dealer to get a better price on the car.
- Ignoring the total cost of interest and fees over the life of the loan.
- Stretching a loan to 72 or 84 months just to lower the monthly payment.
