Buying a Car with Cash- Crazy or Crazy Smart?

I wrote a couple of weeks ago about looking at total purchase price instead of just looking at monthly payments. I was showing how not paying attention to your car payments can lead you to spend much more than you planned to.Here’s how it affected us with our old car loan:

I bought a car for about $10,000 at an interest rate of 13.75%. My car payments were around $230/month. With all the finance charges and fees, if I stuck to the car payment schedule, I would pay a total of $15,962. Fortunately we paid our car loan faster than planned and saved a bit of money in the process.

I thought about it some more after Craig over at Free From Broke shared a wonderful lesson from a car ad on working hard for your goals.

It’s a keeper for me and got me thinking about being able to do that now. Is there a way you can realistically buy a new or slightly used vehicle with cash?

Can you avoid a car loan for your next car? I decided to evaluate my viewpoints and analyzed how others have been able to do it.

Buying a Car with Cash – Guide to Fulfilling a Dream

As you know, my husband and I have been trying to avoid car loans for awhile. When his car was declared a total loss by the insurance company, we hunted and found a replacement that we paid for with cash.

It was a comparable car to what he had before in age, but the condition was a huge improvement and it motivated us to keep saving up for our cars. We also saved a lot by researching automobile insurance quotes (more on that below!)

If you’re looking at buying a solid car with cash, here’s a step by step plan on getting it done.

Decide on a Timeframe

You should try to base it on the current condition of your car. According to Consumer Reports, well maintained cars last on average 200,000 miles.

If you drive between 12,000-15,000 miles a year, then you’re looking at approximately 13-16  years for your car. I know many people aren’t interested in driving an older car and some cars have a reputation of breaking down sooner, so I’ll base my guidelines on lower, but still reasonable numbers.

If you’re looking for general guidelines, here are my recommendations:

  • Current Car is between 1-3 years old- Wait 5-6 years for your next car
  • Current Car is between 4-6 years old – Wait 3-5 years for your next car
  • Current Car is between 7-9 years old – Wait at least 2 years for your next car

If your current car’s condition is not that reliable, then base your estimate on a car a few years older as a hedge.

If you’re car is older but reliable, then keep the schedule for it’s age. I’d rather you err on the conservative side and have more money in your pocket.

Don’t be disappointed if your current car throws off your schedule a bit and breaks down sooner than you anticipate.

Automate Your ‘Car Payments’

Believe it or not, if you want to get free from a cycle of car payments, you need to make some more. The good news is that these car payments are much more manageable and earn you money, instead of draining you.

Start small and automate 1/2 of your previous monthly car loan payment to put into specified savings. Your family’s monthly cash flow will have some more breathing room since you’re only putting in some of your old payments. Reallocate the rest as you see fit.

This step can help you build financial cushion, especially in turbulent economic times like these. If you want to slowly increase your savings, then go ahead adjust your automated deposits.

Find the Best Account to Keep Your Money

Find an FDIC bank or CUNA credit union in your neighborhood that offer high interest rates for savings and watch it grow faster. Look at Bankrate to compare checking and savings accounts. You should be able to find something to suit your needs.

Hunt for a Great Deal Early

Start looking for your new car about 9-12 months before your plan on getting it. The first step is filtering potentials based on your budget and your must have list.

  • What kind of car do you want? (ie Sedan, Coupe, SUV,Convertible)
  • What kind of transmission do you want?
  • What’s the total cost of the car you want? Edmunds offers a True Cost to Own list that they update regularly.
  • What’s the gas mileage for the car?

Now that you’re armed with information and you have cash in your car replacement, you can get the car that you want and spare yourself huge car payments.

Buying Cars with Cash – Not Just Us!

There are some great resources on the topic if you’re serious about paying for your next car in cash. If you’re looking for some more stories to help keep you focused, here are some of my favorites:

Food for Thought

Maybe these posts will motivate you to at least consider the possibility of being free of car loans. I don’t think car loans are evil; I just thing we should look at all of our options, including waiting and paying for a car with cash.
Photo Credit: MSVG

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  • Financial Samurai Oct 26, 2010, 10:03 am

    I think paying cash is pretty darn smart, b/c it is painful to pay that much in cash, which will force you not to pay so much!

    • Elle Oct 26, 2010, 4:04 pm

      I feel exactly the same way – paying in cash makes you consider if it’s really worth it.

  • Getting Out of Debt Oct 26, 2010, 2:25 pm

    I totally agree with this post.

    I used my Google Adsense earnings to pay off my last car loan. So this time, I decided to save up my Adsense earnings to buy it cash. I’m not getting a brand new car, just something to get my son around. He’s going to start his first job in PA (we live in NY) and start college in January. He’s only 1 of 7 kids. Yes, I drive my oldest to work and the other back and forth to sports/community service. I’m tired of driving… LOL!

    Great post!

    • Elle Oct 27, 2010, 8:21 am

      Great job on using extra income to pay down debt! I’m sure your son will appreciate the car.

  • Everyday Tips Oct 26, 2010, 3:17 pm

    We have purchased our last two cars with cash. Not having a car payment is so darn liberating. I put about 27k miles on a car in a year, so I usually ‘done’ with a car after 6 years or so. (I am way too nervous to use a car with anywhere near 200k miles.) However, maybe once I am not driving kids anymore I may think differently.

  • Evan Oct 26, 2010, 3:42 pm

    My Car is SO UPSIDE DOWN! I can’t wait till I pay it off, but I have years to go.

    • Elle Oct 27, 2010, 8:22 am

      Evan, I was upside down at one point with my car loan. It was so frustrating, but we eventually won out. I’m rooting for you!

  • Car Negotiation Coach Oct 26, 2010, 6:51 pm

    Elle, If you can swing it, buying a car with cash is absolutely the way to go! I’m definitely anti-debt. And negotiating total price is also a great tip!

    And, I will offer one extra tid-bit. If you’re buying new or used from a dealership, do NOT mention you’re buying with cash until after the price has been settled. You’re under no obligation to discuss method of payment yet and mentioning cash may hurt your negotiating stance. This is because dealerships make a lot of profit if they provide the financing and may be willing to give you a slightly better deal if there’s a chance you’ll finance. I always settle price first and just say that i’d like to discuss payment after.

    • Elle Oct 27, 2010, 9:01 am

      Wonderful tip CNC – I didn’t think about that! Buying a car is a big purchase, getting the best deal pays off so well. Thanks for the info 🙂

  • Robert @ The College Investor Oct 26, 2010, 9:13 pm

    I agree that it is so important to weigh your options.

    When I bought my first car, I took out a car loan just because I could get a great rate (1.9%). This was also when I could earn 4% in my savings account. When the recession hit and interests rates dropped to nothing (mine was like 0.25%), I took the money out of savings to pay off the loan, since it no longer made financial sense.

    Great tips!

  • Craig Oct 26, 2010, 9:44 pm

    I think you need to look at other factors as well like – What else can we be doing with the money? For us, paying cash for a car meant having less cash flow to buy a house. Since our credit is good we were able to get extremely low interest rates on our car through financing which allowed us to have more cash for our home. These days you can get 0% financing on a car. With discipline, you can make more off the money you would have paid upfront for the car. Still, when we have bought our cars we had the cash to buy them outright but chose not to due to the low interest we were getting.

  • plin Oct 27, 2010, 2:30 pm

    On a not so related note, it is not a good idea to actually walk into a car dealership with a suitcase full of cash if that is how you are planning to purchase a car.

    A friend of mine did just that and the next thing you know the dealership phoned in the IRS and he was under investigation by different agencies regarding the source of his funding. While he has nothing to hide it did create additional unnecessary hassle.

  • Pete Oct 28, 2010, 3:22 pm

    We paid cash for our last two cars – both were 2-3 year old cars when we bought them with less than 30,000 miles on them. We still pay car payments now, but instead of to the bank – we pay them to ourselves as kind of mentioned here – and when the time comes to buy another car, we’ll have enough cash saved to pay for that one as well. It is so freeing to not have a car payment – and to be driving a paid for car. No worries about being upside down or having the car die before the payments do. 🙂

  • retirebyforty Oct 29, 2010, 4:09 pm

    We just purchased a car with cash! We (2) share one car so it was a bit of a hassle when it broke down. We used a car sharing program for a couple of months and saved as much as we could. That saving + our emergency fund was enough to pay cash for a vehicle. Now we have to build up our emergency fund again. 🙁
    The old car was a ’98 though so it was getting long in the tooth.