Buying a car: Do car dealers prefer cash or financing?

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July 29 2019
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Buying a car is probably the next big expense most people have after a property purchase. But when it comes to meeting the cost, it’s more likely for people to seriously consider paying in cash – especially if they’re buying a used car.

Many think that they can get the best deal for a vehicle purchase if they pay in cash for a car, but this isn’t always the case. The best way to know how a car dealership prefers to be paid is by asking the sales agent before you finalise a car purchase or when you’re still shopping for the car you want.

What do car dealers prefer: cash or financing?

A car dealer’s preferred payment option really depends on how the dealership manages its business – some prefer assured cash, while others push for financing.

There are many reasons why a car dealership would prefer one type of payment over the other, but the determining factors usually boil down to choosing between assurance of a sale or increasing profit.

Buying a car with cash

Some dealers prefer being paid in cash – or at least they don’t mind receiving an upfront lump sum payment because it’s already an assurance for the sale.

In most cases, car dealerships that are focused on the sale of their offered vehicles are the ones that tend to prefer cash because it’s a quick way to close the deal. Sellers that prefer cash-based transactions usually offer discounts or other promotions that are not available to credit payments.

This is also an advantage for the buyer since they don’t have to worry about regular car payments that they need to pay with interest. Some advantages to paying in cash are:

Fast transaction
Paying in full in cash means closing the transaction fast, which, in turn, means that the seller doesn’t have to repeat explanations about the car to many potential buyers who may insist on asking for a discount. Cash transactions may also be preferred by private sellers of used cars who are relocating and are in a rush to sell their car. Having cash on hand increases the chance of closing the deal.

No third party
A lump sum cash payment means the seller doesn’t need to have to deal with a third party, and they keep all profit from the sale.

Buyers, on the other hand, don’t have to worry about making regular monthly payments and interest rates – it’s just a one-time transaction that won’t add to your financial responsibilities or become a burden if, by some unfortunate event, your income drops.

Buyer bonus: Your credit score remains intact!
Financing the car purchase is similar to using your credit card to buy a high-ticket item – missed car payments can negatively impact your credit score. Paying with cash, on the other hand, also means you don’t have to borrow money, so there’s absolutely no chance that the transaction would affect your credit score.

Finance the car

You may think that you’d get better deals if you pay a car dealership outright in cash, but some actually prefer their buyers to pay off the car through financing.

For cash buyers, the idea of giving a higher preference to financing or buyers who may not have the financial capacity to pay in full outright may seem strange. However, such preference simply reflects the seller’s priority, which is usually to earn a profit from sales.

Sellers profit from commissions
Some dealerships have arrangements with lenders to earn a commission or profit from loan applicants who borrow money through them. The dealer will receive a lump sum amount for the sale whether you pay in cash or a car loan.

But if you avail of the financing the dealer recommends, they don’t only get paid the price of the car you’re buying, they also get paid a commission and other incentives for giving the lender a new client.

If you decide on financing your car purchase, experts recommend shopping around for the best deals and rates instead of simply accepting a financing deal offered by the dealer or their partner lender. Do your research to find the most favourable loan terms, but don’t push forward with the loan until you’re sure that you’re getting the car.

You may also wish to consider credit unions because they sometimes offer better deals than banks.

Do your research before buying

As with any financial decision that involves a large amount of money, always practice due diligence.

Regardless of how you will fund your car purchase, always ensure that you will still have more than enough money left over to meet your daily expenses and grow your savings.

Explore Nest Egg for more smart spending tips.

About the author

Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

About the author

Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

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