Most prices in the United States are non-negotiable.
You can’t go to McDonald’s and start haggling over the price of a Big Mac in the drive-thru window. Nor can you show up at a Nike outlet asking to pay 70% of the listed price for a new pair of Jordans.
When it comes to buying a car from a dealership, though, you better be ready to negotiate.
Perhaps that’s why we’re so fascinated with the process of buying a vehicle. You can get a better or worse deal based on your own decisions. And that matters, because it’s often the most expensive purchase we make outside of a home.
So what’s going to get you the best price: financing through an auto loan or paying cash?
That’s what a listener of the Clark Howard Podcast recently asked.
Should You Finance a Vehicle or Pay in Cash?
That’s what a listener wondered on the Jan. 23 podcast episode.
Asked Deb in Georgia: “In negotiating for a car, will you get a better deal if you finance or offer to pay cash? Or should you even say?”
Car dealers used to slap a sticker price on their vehicles with a number way above what they were willing to accept. But those days have been gone for years.
Now, with all sorts of information on the internet, the amount of profit — especially in a new vehicle — isn’t nearly what you’d expect.
However, dealerships make money in other ways: expensive upgrades, maintenance, extended warranties and financing. The latter is especially attractive. If a dealer knows it can gouge you on a loan, he or she is more willing to cut you a deal on the price of the car.
Of course, that’s not possible if you secured financing from a credit union or online bank.
“If the dealer knows up front you’re paying cash, they’re not going to give you as good a deal on a car. Because they make a fortune on writing those loans,” Clark says.
“So you never, ever, ever discuss whether you’re going to have a trade-in, how you’re going to finance, anything like that, until you have a deal on the price for the vehicle.”
Why You Shouldn’t Disclose To a Dealer If You’re Paying Cash or With a Prequalified Loan
Car dealers may try to pitch you on getting a loan through them. We work with eight different banks, they may say. We give them so much business. And we can pit them against each other in ways that you can’t.
Don’t listen. I once worked for a car dealership where they’d take whatever rates they’d get from partner banks — which were never as good as a credit union — and pad the number with extra interest to increase their profits.
Whether you’re paying cash or you’re getting pre-qualified elsewhere, either way, those payment methods are going to remove that profit center as an option for the dealership.
So don’t disclose to the salesperson that you’ve already got the money to pay for the vehicle. And don’t get financing through the dealer.
“The benefit of doing a credit union loan vs. going to your bank is the largest gap it’s ever been,” Clark says. “So you’re paying a massive amount more for that vehicle loan arranged at a car dealer.”
Try your best to negotiate a better bottom-line price for the vehicle you want. Even if it means allowing the salesperson to fiddle with the infamous foursquare where they try to pin you down on a monthly payment but stretch out the loan term they’re proposing.
Get them to agree to a bottom-line price on the vehicle, even if they think you’re financing with them.
Final Verdict: Finance or Cash?
To get back to the original question more literally, you’re going to pay less for a vehicle overall if you’re paying in cash — assuming the price is the same.
With any type of loan, even a great rate from a credit union, you’re going to have to pay interest. You won’t have to pay any interest if you buy in cash.
However, in some cases, in order to get a dealership to stick with a price you’ve negotiated, you may need to pull out your pre-qualified loan from your credit union or agree to a dealership’s financing — and then pay off your loan in full immediately before it accrues interest.
Buying a car takes some planning and knowledge. At least if you want the best deal.
It also necessitates that you avoid taking a loan from a car dealership because those are packed with profit-taking interest.
Paying in cash is the cheapest way to buy a car. At least in a vacuum. But a car salesperson will hesitate to give you any money off the sticker price if that’s the only way the dealer can make any profits.
If you can’t pay in cash, try securing a loan from a credit union ahead of time.