Leveraging cash for buying car

Question

I'm planning to buy a 2- or 3-year old car in cash. I expect to pay around $15k. I'll probably buy through a dealer because I can't find any private sellers in my area with the type of car I'm looking for.

My question is whether and how I could use a cash purchase to my advantage. I have bought several houses in cash and know that that is a big advantage because it makes for a speedier transaction, and one that is less likely to fall through unexpectedly. Therefore, house sellers are more inclined to work with cash buyers.

But when it comes to buying cars from a dealer, I have read that paying in cash can actually put you at a disadvantage, because dealers want to be able to sell you a car loan on top of the car.

Is that true? If so, how could I mitigate the issue? Could I say that I am going to buy with a loan, and do the financing through the dealer, then back out of that promise and say I'll pay in cash once I have settled on a price for the car?

Relatedly, does it matter to dealers if I can say that I can buy the car immediately, without them having to wait on my loan processing or worry I won't get approved? I'm guessing that these things are not a big deal to them because my sense is that a car loan (unlike a mortgage for a house) doesn't usually take more than a few days to process, and most people are able to get one unless they have exceptionally bad credit.

Thanks in advance for any thoughts.

Locale might be important. I have recently spoken to a dealer that offered a rebate for cash purchases (not USA). But that is a new car, and I mentioned that I am also looking at a competitor's model. — frIT, Jun 14 '19 at 09:24
Let's assume USA. If you can buy a house cash, you are either not in Europe or don't need to worry about 2nd hand car purchases. — KlaymenDK, Jun 14 '19 at 13:01

TTT · Answer 1 · 2019-06-14T06:00:35.427

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I have read that paying in cash can actually put you at a disadvantage, because dealers want to be able to sell you a car loan on top of the car.

Every time I've purchased a car, the purchase price is set and agreed upon before I step into the finance office (meaning they don't know if I'm going to finance or pay cash yet). With a fixed price, once you step into financing, it's the finance manager's job to make the dealership additional money above and beyond what the sales team accomplished. They do this by getting you into a profitable loan, and trying to add on warranties, service contracts, and upgrades. So you can first negotiate the price of the car with the sales team, and then potentially re-negotiate with the finance manager by accepting a loan that ultimately makes the dealer even more money.

When you go into finance, I'd just tell them you plan to pay in cash, but if if would be mutually beneficial for you to finance, you'll consider it. "Mutually beneficial" may translate into a lower purchase price, or perhaps they could throw in some service vouchers, tires, nice floor mats, etc.

edited Jun 14 '19 at 06:00

answered Jun 13 '19 at 17:38

TTT

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But how can it ever really be mutually beneficial if the intention of the loan is to make more money for the seller? – Jun 14 '19 at 07:27
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@JanDoggen The dealership's purchase cost for the extra items will almost certainly be less than the price of those items for the customer if bought at the dealership, and it also may be less than the money the dealership makes from the customer choosing to take out financing to pay for the car. It would be a pretty narrow window within which this is the case, but there's nothing in principle that prevents such a window from existing. – user Jun 14 '19 at 08:47
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But how can it ever really be mutually beneficial if the intention of the loan is to make more money for the seller? In terms of the benefit being a discount for financing, the seller makes their money when the paperwork is signed. There are very rarely any impacts to them based on what happens after that. The "mutually beneficial" aspect is beneficial for both the dealer and the customer. It's really the bank that loses out, since they're the ones paying the origination fee to the dealer (who is then presumably passing some of that on to you as a discount for taking out the loan). – dwizum Jun 14 '19 at 13:10
@JanDoggen - I meant mutually beneficial to both the dealer and the buyer compared to not financing. dwizum has a good explanation of how it works (the bank loses in that scenario). – TTT Jun 14 '19 at 17:55
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You can always lump-sum pay the loan off in the first month. Then you might get freebies from the dealer, or a better sale price, plus you don't accrue any interest on the loan. Just make sure the loan doesn't come with an early pay-off fee or penalty. – SnakeDoc Jun 14 '19 at 18:49
Also, a good salesman will ask very early on into your "relationship" how you intend to finance the car. They're feeling you out... is it a lease, a loan, or a cash buyer. – SnakeDoc Jun 14 '19 at 18:52
@SnakeDoc - Agreed. If you check out the history of my answer you'll see I initially implied that you could use that to your advantage, but then I decided that the sales team likely wouldn't willingly take a hit with the assumption that the finance team will make up the difference. And if that assumption is correct, you can be honest with both sales and finance without needing to play any games. – TTT Jun 14 '19 at 21:27

score 11 · Answer 2 · answered Jun 13 '19 at 15:21

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Keep It Simple without needing to deceive them.

Negotiate a lower price by financing.
Make sure that there's no prepayment penalty!!
Pay off the car on the first due date.

answered Jun 13 '19 at 15:21

RonJohn

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the % fees the bank charges you for taking the loan does not go away by paying off the car since it's borrowing fee / loan cost. You'd have to get a much better deal in order for it to make sense.

Jonast92

Jun 13 '19 at 17:25

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@TTT the opportunity to do #1 is based on the dealer getting a rebate for originating the loan. Manufacturer rebates for loans (i.e. you buy a Ford and finance with Ford Motor Credit) are typically done as limited-time promotions and can be significant (several thousand dollars). But local banks and credit unions are typically paying the dealer for origination too, although perhaps only $500 - $800. If you go in knowing that, and you finance, you can certainly ask for part of that rebate. The dealer will be more likely to give it to you as additional discount vs someone paying cash. – dwizum Jun 13 '19 at 19:11

I just recently bought a car with cash, and the insurance premiums were far, far lower vs. paying for insurance on a car with a bank lien (i.e., loan) against it. – Bort Jun 14 '19 at 12:27

When you pay a loan off on the first payment date, the lien is removed, and you're in an equivalent situation to having paid cash. That's the beauty of this approach. You get the potential benefits of a loan combined with the potential benefits of cash, without any of the downsides of either. – dwizum Jun 14 '19 at 13:07

@dwizum Is 'no penalty for prepayment' the same as 'all overpayments are applied to principal'? 'Penalty' implies an additional fee assessed on top of what you'd owe for the purpose of disincentivizing an early pay-off, whereas the bank simply collecting the total of all payments listed in your loan payment schedule, interest included though never accrued if you pay off the loan on day 1, seems dishonest of them and stupid on the part of the borrower, but not a 'penalty' per se. – Bort Jun 14 '19 at 13:28

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In terms of payment application, literally paying a loan off is typically handled differently than an overpayment (in the sense that you send in more than one month's payment). Banks have payment logic to determine what to do with an overpayment, automatically. Whereas, in most cases, to pay the loan off, you'd request a payoff amount, and the bank would provide a payoff amount and a timeframe during which it's good. The amount would include interest accrued but not yet paid for. You're only responsible for interest accrued until you pay off the loan. They can't charge you for future interest. – dwizum Jun 14 '19 at 13:34

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The catch is, some loan contracts will include a literal early payoff penalty. The contract may say something like, "if you pay this loan off within 6 months of origination, you owe us an extra $600 fee." That explicit early payoff penalty is what you want to check for, and avoid. Some banks do this as a way to protect the fact that they just paid the dealer a lump sum to originate the loan. – dwizum Jun 14 '19 at 13:36

Thanks for this insight... The first car I ever financed I paid off early, and since I was young and stupid, didn't request a loan payoff formally, and of course the bank pocketed a year of free interest and said nothing. – Bort Jun 14 '19 at 13:48

score 4 · Answer 3 · answered Jun 13 '19 at 19:48

Does buying a car in cash put you at a disadvantage? No matter, disadvantage probably isn't the right word and it's not in your best interest to assume an outcome. There's no law against asking if the dealer benefits from writing a loan while you're negotiating the price.

The hardest part of negotiating a car is getting the dealer to discuss the price of the car, not the financed monthly payment. Get a financial calculator app for your phone, learn how to derive a payment amount and principle amount from the relevant variables. But assuming every sob story about a bad car buying experience is coming from a similarly competent buyer is a waste of your time.

There are some dealers that are really loan brokers. The car is just a commodity used to sell loans. The first car I ever bought from a dealer very clearly wanted to also sell the loan. I bluffed and told them I was pre-approved by a credit union for X% (which was much better than their first attempt at a loan offering) which they very agreeably matched.

There are some dealers that shoot specifically for manufacturer sales volume incentives. They just want cars to transact, they don't particularly care about the price of the specific cars, they make their money on volume bonuses.

There are some dealers that are the lender. That dealer never really actually wants to sell the car. The car works, it's sold for a down-payment to someone who can't pay the loan. The car eventually gets repossessed and sold to the next person who can't pay.

The last time I bought a certified pre-owned car the dealer could not have cared less about how the car was paid for. They didn't hardsell extended warranties and gap insurance and lojak either. Does every single Audi dealer operate that way, probably not. Would the experience have been the same if I was buying something new from the same dealer? I don't know; maybe. Does that mean a Toyota dealer down the street is the same? Or an independent used car dealer?

Dealers aren't all the same. Transactions aren't all the same. You can be blunt while still being respectful. Cash or loan indifference makes you a good candidate for the best price for that car from that dealer.

Dealers trying to qualify for manufacturer incentives can really work in your favor if you buy on the last day of the month. They will lose money to get a car sold that pushes them over the threshold to qualify for a bonus. There's a great podcast on this subject: https://www.thisamericanlife.org/513/129-cars — Mohair, Jun 14 '19 at 17:00

score 2 · Answer 4 · answered Jun 13 '19 at 15:12

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You hold a very good hand when buying car with cash because you are only interested in the final price. Therefore, many of the financing tricks they will use do not apply. You need to know what a good price for the car you want to buy is, so research your local market and what value certain options should be worth. If at the end, the paperwork does not agree with your negotiated price, walk away.

The dealer will absolutely try to get you to use financing. They will even say that you should get a loan now and just pay it off immediately a month from now. Ignore it. Stay firm and insist that they don't need to run credit checks and you will only use cash. For new cars, they will say you are ineligible for certain cashback discounts. Again, this doesn't matter because you are looking for a bottom line price. You can mention that you prefer a clean title if it helps them stop. The important thing to show that you are a no-nonsense buyer and they should just come to a deal fast and get you out of there.

answered Jun 13 '19 at 15:12

pboss3010

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Taking a hardline approach for literally paying the dealer in cash is going to run the very real risk of actually costing you more. If a dealer can get a $1k kickback by having you finance, they're not going to magically/automatically give you that same $1k discount if you pay cash, since that's money off their bottom line. – dwizum Jun 13 '19 at 15:43
Agreeing with @dwizum -- if you leave all options on the table, you give dealers room to give you a better deal. You definitely have to know what you're buying is worth, though, and if you do do something squirrelly with financing, you still have to know what the terms of the deal are so you're not accidentally spending more money. – bvoyelr Jun 13 '19 at 16:38
I'm not the type who cares about getting every last dime, though. I research what a fair value would be, and if the dealer can get to a price I find fair, that's great. I'm not going to lose sleep over a couple of thousand. But the lack of car payment and not needing to go through a title check when getting rid of car are pluses to me. – pboss3010 Jun 13 '19 at 17:24
I'm not the type who cares about getting every last dime, though that's fine, but the question seems to basically be asking, "how can I leverage my choice of payment method in order to get every last dime?" – dwizum Jun 13 '19 at 19:12
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At any rate, I don't think anyone answering is advocating for actually carrying a loan, just taking one out as a tool to leverage discounts, and then immediately paying it off. This meets your requirements of not having a monthly payment and not having a lien on the title when you want to sell it years later. Effectively, it leaves you with the same end result as actually paying cash, but with the chance of getting a better price. – dwizum Jun 13 '19 at 19:14

score 2 · Answer 5 · answered Jun 13 '19 at 15:37

But when it comes to buying cars from a dealer, I have read that paying in cash can actually put you at a disadvantage, because dealers want to be able to sell you a car loan on top of the car.

I don't know that it's a disadvantage, per se. If you're buying a new car there's typically an incentive to take out a car loan from the car company's bank. They provide the dealer an incentive to promote those. If you're amenable to it, you can always take out the loan (typically there's no up-front financing charges since they make their money from you buying the car), pocket the incentive, and you can pay the loan off before you pay any significant interest. You can often come out ahead in this type of situation if you play your cards right.

The real power of cash is in being able to walk away. In a world where most people are slaves to a credit check ("Hey, we'll work with you if you don't have good credit"), they know you can easily go elsewhere to get a better deal. Get offers from multiple dealers and be prepared to shake hands and walk out. I had to do this on a van I bought recently. We had mostly cash and I knew they were overcharging me for a trailer hitch I wanted added. Sure enough, the next day the car salesman had found a way to bring that down to a reasonable amount (they contracted with a nearby aftermarket installer instead of installing in-house).

Leveraging cash for buying car

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