Paying Cash for a New Car

As a young man, I paid cash for all my cars. Decision makers of the World War Two generation just couldn't see the baby boomers ever qualifying for any kind of financing. Credit cards, which are now available to unemployed college kids based on grade point average, were difficult to obtain.

I bought a new 1974 Pontiac Ventura Sprint hatchback for cash and a broke down trade in the winter of '74. I saved the cash, $2,350, on a between-semesters delivery truck job while in college. The car salesman couldn't believe anybody could accumulate that much green paper by honest work. That brand new car sold for $3,400.

Cash purchases faded away in the late 1990s as a leasing boom took shape. Cheap lease deals on more expensive models discouraged paying cash. When the lease boom crashed there was a brief cash buying resurgence before the September 2001 attacks, which resulted in zero percent emergency financing offers from manufacturers and artificially low interest rates from Alan Greenspan's Federal Reserve.

Despite the fact that one-third of new car buyers paid cash in the 1950s, dealers today are not overjoyed to greet a cash customer.

The first question is "How can I get you into this car today?"

Next comes "How do you plan to pay?"

There are three possibilities; cash payment, lease, or financing.

If a buyer answers "paying cash", the whole deal will take a new complexion.

Paying cash includes those who arrange financing outside the dealership.

Cash and outside financed buyers greatly reduce dealerships profit opportunities on a specific car. This is one reason for the many horror stories from folks who walked into a dealer ready to buy, but got shuttled to other cars, jerked around, or were simply encouraged to shop elsewhere.

There is little money in selling new cars, the competition and inventory surplus force margins down. The real money is made in financing and the after-deal high margin products that go with it.

Dealers get kickbacks and point markups for arranging loans, selling credit life, disability, and GAP insurance to over leveraged buyers, and wrapping charges for extended warranties and dealer installed options into the finance package.

This can account for three quarters of a dealer's profits on near-cost deals.

Some dealers will even run off cash-paying customers, but this has declined in the 2007 sub-prime mortgage financial crisis. The car industry as a whole needs the financing angle to stay afloat.

Cash deals are up in the first half of 2007. Almost 12 percent of buyers paid cash for cars this year, compared to about 8 percent in recent years.

This is part of the reason American cars are so BIG. BMW has proven that better is not necessarily bigger. But US builders and their dealers need overpriced barges to carry the financing and pricey option wraps that turn their profits. This is one aspect of how the shift to smaller cars, many of which will be paid for in cash, is so threatening to the industry.

Cash buyers tend to be better educated and wealthier than the average buyer. 42% are female.

Mercedes-Benz, Volvo, Audi, and BMW dealerships see up to one-third of sales in cash. At the top of a stock market or during the run up of a real estate bubble, more luxury cars go for cash.

Interest Rate Arbitrage

Money experts say paying cash for a car, which depreciates rapidly, is a mistake.

The idea is that the money might earn more as an investment than the low interest sometimes available as an incentive to car buyers. I don't see the difference between cash and a loan as far as the depreciation is concerned, a buyer will pay for it regardless.

Low interest loans generally are alternatives to other incentives, go only to those who really don't need a loan, and are associated with deals going for MSRP.

But dedicating actual money to a big ticket purchase does have some opportunity costs.

People with debt at high interest rates, like credit cards, might be better off using any cash to pay off the higher interest loans.

Interest on car loans is not deductible for tax purposes.

To me, buying a car, which yields no real profits, and a loan, ripe with opportunity for gain, from the same institution, is foolish. Got O'Brer Fox a-watchin' da chick'n coop.

Negotiating a Cash Deal

Cash eliminates much of the negotiation process: the down payment, the interest rate and the monthly payment. If the buyer also has no trade-in to dispose of, the dealer is really over a barrel, he has no tricks to disguise the true cost of the car.

There are three possible ways to approach a cash purchase; hide the ball, honesty, and fax attack.

Hiding the ball means refusing to discuss financing until they accept a price.

Dealers will want to talk about financing right up front.

When they realize this will be a cash sale, and they won't take long, price negotiations will bog down. Any dealership sales manager has seen this hundreds of times. They might let you think they didn't realize you weren't financing, but they can make a payment buyer in 60 seconds. Anyone not confessing to needing payments within 5 minutes will draw management scrutiny.

The honest approach calls for telling them upfront that you want to pay cash. You will never see their best price, but by saying you are ready to buy today it is sometimes possible to avoid lots of dancing. But many dealers will prepare,and try to push, the financing paperwork regardless of what the buyer says.

Frequently dealers will attempt to continue to structure the deal on an installment-sale contract basis despite repeated protestations from the buyer.

Although I always consider the quality of the dealership much more important than the lowest possible price, faxing or emailing dealers works best with a cash offer.

Many dealers will low-ball a fax attack, just to get the buyer on-site. Then they can horse the deal to turn a back office profit, or run off the off-site bidder.

And be careful, it is easy to remove options and intangibles from the fax-attack cost killer deal.

To me the available cash instantly says "low mileage used car from a desperate private seller."