NEVER Pay Cash for Cars! (Here's Why)

If you're the type of person that likes to stay out of debt and you want to pay cash for your cars, then that is totally fine by me. Go ahead and pay cash for your cars. I just want you to consider a few things here that it's not always the best idea to use up all that cash for your cars and that's exactly what we're going to be talking about today. So in this video I'll be going over the three reasons why you don't want to be paying cash for a car and the third reason actually has to do with the dealership. So if you are in the market for a new car and you're going to be going to the dealer and paying cash, then pay attention to this reason specifically because the dealers don't actually want your cash. They don't make as much money with that type of negotiating and I'll explain all of that in this video. Okay so getting into everything, the first reason that you don't want to pay cash for your car has to do with your personal savings priorities. Now this doesn't have to be complicated here but I'm basically saying that if you're buying a $25,000 car with cash and only have $25,000 in your savings account, then you probably don't want to wipe out all of that money just to buy your car and to stay out of debt. You actually want to be prioritizing things so that you're buying your car after the important stuff has already been taken care of. Because the last thing you want to have happen is to have a brand new car in your driveway but then have an unexpected expense happen and you don't have the money to cover it because you just wiped out your This obviously means that you need to have an emergency fund on top of the money that you're paying for your car but you also need to take care of the other priorities as well like retirement, insurance, all of those types of things need to be taken care of first before you're buying the car because on a priority scale those do come first even though I know we need a car to drive everywhere but we need to be taking care of our future and that is a much bigger deal especially in the long term. Like I said earlier buying a car with cash is not a bad thing but I just don't want you blowing out your entire savings account just to stay out of debt because for instance if you had a million dollars in the bank and you bought a $30,000 car that's not exactly a bad ratio of blowing out that type of cash out of your savings account but if you only had $35,000 in the bank and you bought a $30,000 car obviously it's probably too much car but in this case that ratio is just too much and you're overextended and you're using up way too much money that you need for other things in your life in case something unexpected happens. Now the next reason that you don't want to pay cash for your car is because all of that cash that you're using on your car could be leveraged elsewhere and I'll explain this to you guys. A good example of this is if you were out there buying a brand new car and the manufacturer offered zero percent financing for the entire term then that zero percent might actually be a good thing for you to take on and make those monthly payments because instead of using up all of that cash to buy the car outright you get the zero percent financing so you're not paying anything for it and then you could stick that money in a high yield savings account which generally earns about one to three percent interest. Now that's not happening right now it's actually 0.6 just because of the way the economy's going but usually they're about one to three percent interest obviously that's going to make you a lot more money by using that cash in that account and then just making monthly payments on the car. And when it comes to a high yield savings account those types of accounts are FDIC insured so there's no risk involved but you could also use that money in real estate or the stock market obviously there is risk here but the potential for returns are obviously a lot higher because there's more risk involved. So I don't know if you've ever thought about this but the S&P 500 index has actually averaged about 10% in returns over their lifetime so that being said if you invested $25,000 into the stock market instead of just buying a car outright then you could invest that and assuming that it's getting 10% we don't know what that's going to be but let's just assume 10% interest you hold that money in there for seven years at 10% compounded every single year and you're going to end up with close to $49,000 at the end of the seven years invested. So obviously there is risk here but in theory you could drive that $25,000 car for about seven years and then you could just buy another one with your gains and you could keep repeating that process for as long as you wanted assuming a 10% return with compounded interest. Now this is not an exact strategy here because obviously you've got taxes that you have to pay on those capital gains and those would affect the numbers that you're trying to do the math with but the point here is that you could leverage the money that you're spending on that car to something else like whether that's real estate or the stock market or just a high yield savings account some of those options might be better because that cash is something that's really important in order to make those assets run for you. Now the third reason that you don't want to pay cash for your car has to do with the dealership specifically here and a lot of people tend to think that if you bring in a briefcase with a bunch of cash then you can get a better deal on your car and that is not actually true because a lot of the time you can actually get a better deal on your car if you finance it through the dealership and I'll explain why. So the biggest problem with paying cash for your car at the dealership is the fact that they don't actually make most of their money on car sales most of the money that the dealership makes actually comes in from the financing department where they can sell you extended warranties obviously they can finance your car and then also in the parts department as well so you've got parts you've got accessories they make money in those areas and those areas actually make them more money than just the initial sale of new cars or used cars. So even if you go into the dealership and you don't plan on buying any extended warranties accessories or anything like that but you are planning on paying cash then the dealership is for sure going to be losing out on one point of that sale and that is the financing even if you don't buy anything else because let's say that you go into the dealership and you want to finance a $30,000 car through them well they'll actually find you a rate and let's say that it comes back at four percent which is pretty competitive but what you don't realize is that they could have a finance reserve built into that rate which means that they get a cut of the rate so let's pretend that they get two percent and then the bank gets two percent well that two percent on $30,000 on a five-year loan is actually worth about $1,500 to them and so that is $1,500 more that they can make on the car assuming that you're going to keep the loan for that entire amount of time. So technically if the dealer was willing to take off another $1,000 off the price of the car if you went with the specific bank and the specific rate it might actually be worth taking on that loan if you have the cash to pay off the car because what you could do is you could finance the car and then a month later you could just pay it off with all the cash that you have and now you'd be saving an extra thousand dollars off the car initially just because you did a quick finance but they don't know that you're not going to keep the loan for the entire term. Now the only way that I will ever recommend you do this is if you run the math and you can clearly see that you are going to save more money by financing the car and then paying it off with cash and then obviously you have to make sure that the loan does not have a prepayment penalty. You want to be able to have a normal loan because most loans don't have prepayment penalties so that you can just pay it off whenever you want to and there is no fee associated with paying off that loan. Now I do have a bonus tip for you guys here if you're buying a car through a dealer and you have some extra cash and this is just the point that a lot of dealerships will actually let you put some of your down payment on your credit card. Some of them will even have up to $5,000 with no fee so pretending that it was $5,000 and you have the cash to pay it off just put that $5,000 on your credit card and get all those rewards points and then just pay off your credit card a month later without paying any interest and then you get all those points and then you still have the money used towards your down payment. Now if you just found this channel I'm Jason with Honest Finance and I make a lot of videos on different topics that will give your life and your finances more value so if you do have an interest in this type of content feel free to subscribe. I will also leave some other car related videos that you guys can watch but thank you for watching. Have a great day.