Do You Need Credit to Buy a Car With Cash?

Young woman using smart phone standing on street

Are you thinking about paying for your next car with cash? Congratulations! Having the financial wherewithal to buy a car outright gives you a real advantage. It can save you money on loan interest, simplify your purchase and pave the way to a payment-free ownership experience.

Here's an added benefit: Typically, you don't need credit to buy a car with cash. That said, a dealership may try to run your credit score and report, even as part of a cash transaction. Read on to learn why you should probably resist—and to find out whether buying a car entirely with cash is a good idea in the first place.

Is a Credit Check Required When You Pay in Cash?

Since you aren't applying for credit in a cash transaction, the dealership doesn't need to access your credit score and report. And in fact, the Fair Credit Reporting Act (FCRA) limits access to your credit information in these types of situations. According to the FCRA, credit reporting agencies may only provide information about you to people who have a valid need: creditors, insurers, employers, landlords and other specified businesses.

A dealership needs your permission to run a credit score and report. They may ask you for it as part of the sales process, so they can find out what kinds of financing you are eligible for and therefore how much you can afford to pay for a car. Dealers often make money from the financing they arrange, so they have an added incentive to talk you into a loan or lease.

A dealership might falsely cite the Patriot Act as a reason to run your credit report. But federal anti-money-laundering regulations do not require a dealership to pull your credit on a cash transaction. You may, however, be required to fill out IRS Form 8300 if you make a cash or other lump-sum payment in excess of $10,000.

What's the harm in having a dealership run your credit? While any resulting damage would be slight, if at all, a dealership checking your credit could result in your credit scores decreasing slightly. That's not a reason to avoid applying for credit you need, but it's a good reason to avoid unwanted credit inquiries. And if the dealership is going to use your credit information to try to entice you into financing a more expensive car than you want, then you're much better off declining.

Benefits of Paying for a Car With Cash

Is cash the best way to pay for a car? Providing you can afford it, paying cash can save you both money and stress. Among the many benefits of paying outright for your car:

  • Discipline: You can't spend beyond your budget if you're limited by the amount of money you have on hand.
  • No interest: According to Kelley Blue Book, the average cost of a new vehicle was $38,723 in September 2020. Financing that entire cost over five years at a low 3% rate racks up more than $3,000 in interest.
  • No monthly payments: You'll still be on the hook for gas, insurance and registration, however.
  • You won't be upside down on your car's value: When you finance a car, your payments are structured to repay interest first, then principal. So, in the early months of owning a new car you may owe more on your loan than the car is worth—especially since a new car begins to depreciate as soon as it's driven off the lot. When you pay cash, you always own the full value of your car.

That's the good news. There are also instances when paying cash might not be the best choice for financing a car:

  • You want to maintain your savings. Using all of your available savings to buy a car probably isn't the best strategy. If you don't have ample cash set aside to buy a car—and maintain an adequate emergency fund—you may want to reassess.
  • The dealer offers you 0% financing. A 0% APR car loan would let you pay off only the cost of the vehicle (plus taxes and fees you'd pay anyway) over a period of several years. This would potentially save you thousands in interest and keep you from making a big lump-sum payment, though you'll still need to pay a down payment. If you're so inclined, you could take what you would have spent on a car, invest it, and theoretically earn income on your cash over the period of your loan. If you get a 0% APR loan and make money on your investments, you'll come out ahead. Of course, you could also lose money by investing your cash: Only you can gauge whether the reward is likely to outweigh that risk.
  • You can always split the difference. Suppose you put 50% of the car's cost down and finance the other half. You could have a small monthly payment or a shorter loan term. And you could preserve half of your cash for emergency savings, retirement, investments or even subsidizing your car payments.

How Financing a Car Works

To decide whether using a loan to cover all or part of your car purchase is the right option for you, it may help to understand how financing works.

Financing a car involves a few basic steps:

  1. Set your budget.
  2. Choose your car (or a few options).
  3. Figure out your down payment.
  4. Shop for financing:
    • Get preapproved for a loan at your bank or credit union.
    • Research online for the best auto loan.
    • Work with your dealer.

Although financing options exist for buyers at almost every credit level, the best interest rates and terms go to buyers with very good to excellent credit scores. Lenders will also want to verify your income, to make sure you're able to repay a loan. Having a substantial down payment helps your case. You can use this cash to reduce the loan amount, thus reducing your monthly payments, interest and the risk to your lender.

If you're building credit, financing a car can help. Making your loan payments on time adds to your payment history, the most heavily weighted portion of your credit score. Having cash on hand also increases your chances of success. You're unlikely to default if your payments are already covered (or almost covered) by savings. An auto loan also adds to your credit mix: Being able to show that you can manage various types of debt can help you improve your scores.

Other Forms of Car Financing

Auto loans aren't the only alternative to paying for a car with cash. Leasing a car lets you drive the car of your choice as a kind of long-term rental—a typical lease term is three years, and you'll usually return it after that time is through. Since you aren't paying to own the car, monthly payments are typically lower than they would be on a loan to purchase. You drive the car only while it's new and (presumably) trouble-free. If you have enough cash on hand to purchase, you can lease instead and pocket the difference. The hitch: You won't build equity. At the end of the lease term, you either purchase your leased car, lease a new car or go carless.

A car loan uses the car you're financing as collateral. If you default on the loan, the lender will repossess your car and sell it to help defray your outstanding debt. Alternatively, you can use an unsecured personal loan to fund a car purchase. But an unsecured personal loan is likely to carry a higher interest rate than an auto loan, and it still requires a credit check and loan application. Bottom line: A personal loan won't save you time or money versus on an auto loan.

Can you pay for a car with your credit card? Here, there are a few considerations. First, a dealer may not want to run a credit card transaction that large. Merchants pay fees on credit card transactions, so your purchase could cost more than they want to pay. Second, financing a car on a credit card could be costly for you. Interest rates on credit cards are typically much higher than what's commonly offered on car loans. You may also lower your credit score by inflating your credit utilization, which is the percentage of your available credit being used by outstanding balances.

On the other hand, if your dealer is game and your credit limits allow it, you may decide to use a credit card to effectively pay cash for your car. Using your card to pay the dealer for your entire purchase lets you avoid going to the bank for a cashier's check or carrying around wads of cash. As long as you can pay off your balance immediately, it won't cost you money—and may earn you some valuable cash back or rewards from your card company.

Cash Improves Your Buying Options

If you're thinking about buying a car with cash, you're already ahead of the game in one important way: Having cash in savings for a large purchase opens up valuable alternatives. You may decide to bypass the lending process entirely. You may also opt to use your cash to help secure and pay for a no- or low-interest loan or a lease. To return to our original question, you don't need credit to pay for a car with cash. But having cash can improve your buying options, including the option of using credit to pay.