What You Need to Know About Paying Cash for a New Car

From WalletPop. Buy a new car--are you CRAZY?

"The economy is still tight except for the stock market. Unemployment still high. Home values still languishing. But some new-car buyers are able to pay cash for a new set of wheels.

The question is: Should you?

Car dealers have long reported that many older customers of certain brands, like Cadillac, Lincoln and Buick like to pay cash for their cars out of personal preference. They don't like paying interest or having monthly car payments.

Until a few years ago, many consumers paid cash for cars out of home equity lines of credit so they could deduct the interest.

Today, many would still like to pay cash, if they can, rather than carry more debt.

Here are a few considerations, though, before you write the check instead of sign the loan papers.

1. Don't mention to the dealer that you will be paying cash until after the purchase price is locked in. This is because dealers make a commission on your loan. If they know they won't be making that money, then they won't come down as far on the price.

When asked if you are financing, be vague. "I haven't made up my mind yet."

2. Get the dealer's best price to this point. Then, tell the dealer you are ready to pay cash and close, but only if you hear his best price. Make sure that you have done research before coming in on a website like Edmunds.com to find out the average transaction price for your vehicle in your zip-code, so you know how good a deal the salesman is really offering.

3. You could also use a buying site like Edmunds to get actual price quotes, and simply take the lowest one. One of those bids will come from the dealer closest to your home.

Now, the question of whether you should pay cash if you can? Here are the issues:

If the price of the car is $25,000, and you have a choice between a $3,500 rebate or zero-percent loan, and you can pay cash, should you take the rebate or the free loan?

The $25,000 vehicle is now $21,500 if you take the rebate. If you paid cash, you are losing $3,475 if you put it in a five year CD at 3%, so the real cost of that cash payment is $24,975.

If you take the original $25,000 price, and the zero-percent loan, it's trickier to calculate. That's because you have the option of, say, investing the $25,000 block of money in a series of CDs, or perhaps in the stock market, while you whittle away at the loan principal month by month. Let's say, for example, you put the $25,000 in a stock index mutual fund with check writing ability, and you pay off your loan out of that account. The total cost of your vehicle will vary with your stock market gains or losses.

However, if you take the rebate, knocking the purchase price down to $21,500, and the loan rate is 3.9%, as it is at GM now for some models, then the total cost of the vehicle is $23,260.00 with a 20% downpayment of $4,300.

Does cash give you much of a negotiating edge? According to Michigan-based auto industry consultant James Dollinger, a former dealer himself, the only real advantage to having cash is that the salesman may give you a good deal because he knows he can close you right away. Dollinger says the best way to get the best price is to come prepared.

"If you are doing a loan, then get pre-approved beforehand from a local credit union or bank, have your title or lien on your trade-in in your pocket. Desk men are more apt to bend for a client who is ready, willing and able to do business and close fast."

My advice: never ever buy new, even when using cash. New cars depreciate 30% when they leave the lot, and you can't make up that loss in clever negotiations, fancy financing, or even a coupon code or a warehouse store benefit purchase. Wait until the car is 3 years old (how long it takes to work off the depreciation), then go buy it with cash, negotiations, fancy financing, or whatever discount tactic you have. The older the car, the more bargaining power you have.

UPDATE: It occurs to me that I might have to spell this out--that 30% depreciation amounts to how much they're overcharging for the car in the first place. You're compensating the dealer for the loss by buying new. To arrive at the true value of the car, subtract 30% from the sticker price, then go do further homework from there. Some new cars are overpriced by as much as 50% to account for union labor costs. Your best bet is to wait the 3 years before buying anything newer.

Don't worry about the poor dealer--he may have to pay taxes on a leftover model, but he can write off the depreciated "value" of the car on taxes. You can't, so don't take the loss in the first place.

If you've ever noticed the difference in price between an import model car and an American model car (same size), the thousands in price difference is due to union labor. Beware you will make up this price difference in parts availability, because all your parts have to be shipped in from overseas, costing time and money.

Whichever way you go, don't buy anything new from anyone--not even one of Oprah's giveaways (she never covers the taxes on it).