Plunking down a wad of bills for a new car may make sense for some, but the benefits of paying cash depend on your overall financial situation. When dealers offer rebates or special finance and trade-in incentives, you may not always get the best deal by paying cash -- especially if special deals are offered only to customers who finance their car purchase.
Car loans cost money in interest, but it's typically cheap money with dealer incentives or the right bank loan. If you can invest your cash and make at least the same interest as you would pay on a car loan (or hopefully more), it doesn't make sense to part with your cash. Of course if you aren't an investor and you leave your money in a box under the bed or in a low-interest savings account, you'll save money by paying cash for your new car.
Where Will the Money Come From
If you are getting all that new car cash from a bank CD, IRA, 401(k), or other investment account, beware of early withdrawal fees and tax penalties. You'll need to weigh the cost saving benefits against the fees and penalties with what you'll save in car loan interest. Your accountant or financial adviser will be able to do some quick calculations to see if withdrawing makes sense for a car purchase.
Selling Stocks or Bonds
Selling stocks, bonds, commodities or other investments to raise car-cash also raises the broker commission question. Just as you'd need to consider withdrawal penalties and fees, broker fees may also get in the way of any substantial cost savings. Besides, unless you really need the money, it's generally best to leave it invested for the future, even if you are realizing low returns at present.
Just Because It's Cool
Never, ever pay cash for a car just because you think it's cool or impressive. Your dealer doesn't care, your neighbors might until they grow up, and it reflects almost nothing on your character except that you can. But really, some people just don't like loans or payments and that's a perfectly good reason for paying cash. The best decision is an informed one, so make sure you call your tax person, take stock of your accounts and investments, and decide if buying a new car for cash is the right move.
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