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While more than 90 percent of car buyers finance their new vehicle in some form (including leasing), paying cash isn't necessarily a bad decision, or a last resort when you're not qualified for top lenders. You simply need to look at the numbers, and think about a few questions:
1. What would you do with the money otherwise? If you were to finance the vehicle, it would free up the money for other things. However you'll also pay potentially thousands on interest over those five to seven years. Use a simple loan calculator to see how much interest you'll be paying, then estimate if you'll be able, realistically, to earn more by holding on to that money and having it in a savings account, in stocks, or in other investments.
2. Will the cash price be the same? Dealerships make more money, in many cases, on the loan than they do on the vehicle sale; so they're going to try hard to sell you on financing. Even after you've agreed on a transaction price, you'll need to be especially vigilant if you pay cash, as the dealership might try to saddle you with additional fees to make up for the lack of finance profits. Also consider that there might be special incentives only on offer to those who finance—and that could potentially negate any savings from not paying interest.
3. How much could I save on insurance by paying cash? While you still owe money on a car, more expensive comprehensive insurance is probably mandatory. Which could add up over the long run.
4. Can I afford this vehicle in the first place? Financial experts typically say that total vehicle payments (including insurance but not fuel) shouldn't exceed 20 percent of your take-home pay. For cash it's a little fuzzier, but if you just can't get the vehicle you want for what you make but have a secure job, take a look at leasing.
5. Is that paid-off feeling worth it? Paying cash has its perks. One of them is simply not having the obligation of monthly payments. If you see that as a burden, want to be free of it, and have the funds to spare, consider paying cash.
See our feature story—Should I Pay Cash For My Next Car?—for more details, as well as a table that runs the numbers with a 2010 Ford Fusion and 2010 Hyundai Elantra.