Frugal Shopper: Should I Pay Cash For My Next Car? Page 2

September 13, 2010
Money, money, money

Money, money, money

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For some luxury brands like Mercedes-Benz and BMW, where half or more of their vehicles are already moved on leases, that means good old-fashioned new-car loans don't make up that much more than a quarter of all sales.

So why do the high-rollers—who you would assume, in many cases, got where they are because of smart money management—pay cash more often?

Toprak says that most of the people who pay cash can be summed up in two types: Older, wealthier customers who simply do not finance anything; and those who are financially ready to buy a new car—perhaps even a luxury car—but can't get financing.

For those affluent buyers, it's not necessarily the sound financial decision, as in some cases they could do better investing the money in such large amounts elsewhere. "But it's difficult to make an argument with these customers," said Toprak, who used to manage dealerships.

Resurgence in those bucking the bank

While the total portion of the new-car market paying cash has declined for the past 20 years, and especially over the past ten years, Toprak reports a resurgence of those paying cash over the past year or two due to the unavailability of credit.

Among those customers who can't get financing—or those who don't like the terms being offered to them—paying cash is sometimes seen as the only way. And increasingly so, whether it be immigrant families who haven't yet established enough credit, or those who have a foreclosure in their not-so-recent past, paying with a huge wad of cash is the only way—especially if you know to avoid certain unsavory subprime credit terms.

But some experts insist that you can almost always do better paying cash. "As long as your finance rate exceeds what you could receive from an alternative investment, it will make sense to pay cash for your vehicle," argued David Wurster, the president of Vincentric, a company that provides vehicle cost-of-ownership data.

The logic? With financing, you spend potentially thousands of extra dollars on interest, over time. On the other hand, handing over the full transaction price has its cons—namely, that those funds aren't available to invest or gain interest.

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