Should You Pay Cash for a Used Car?

One of the things that my father told me over and over as I was growing up was that you should "never pay cash for a depreciating asset". Since cars begin depreciating as soon as they are driven off the lot, it is considered good financial sense to finance the purchase with a bank of credit union. Most people don't pay cash for brand new cars anyway, but what about an inexpensive used car?

The reality is that financial advice will differ depending on you and your specific situation. What makes sense for a well-to-do man in his mid-forties might not be prudent for a twenty-year-old college student. Rather than following cookie-cutter advice concerning your finances and purchases, it is better to look at your situation individually when deciding if you should pay cash for a used car.

Evaluating the Price of a Car

If you're looking for an older used car with lots of miles and perhaps a few mechanical problems, the price of that car might not warrant an auto loan. For example, let's say you're going to purchase a $2,000 car and you put 10% down. Of the remaining $1,800, you'll have to pay the interest that accrues until you pay the vehicle off in a set number of years. In the end, the interest rates might exceed the value of the vehicle, which doesn't make good business sense.

Generally speaking, it isn't a good idea to pay cash for a used car costing less than $3,000, unless you simply cannot afford not to finance it. The amount of money you'll pay out in time because of interest will deplete the benefits of financing.

Drawing Upon Your Savings

The best reason to finance a used car versus paying cash is the withdrawal of savings from your bank account or investments. The interest you pay out in financing the vehicle might actually be less than the interest you make on the money while it sits in your savings account or the stock market. If you're purchasing a $15,000 car and decide to pay cash, you have to remove that cash from your investments and stop making money off of it.