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[P143]Paying Cash New Car

by Michael Benifez.., Mic

In this article we'll focus on just one technique to improve your finances - paying in cash. Here's how making cash-only purchases can help you to budget, save and invest.

A Plastic Paradise

With rapid increases in the use of plastic over hard currency, some people consider carrying cash old fashioned. To be fair, plastic is much sexier than a bit of coloured paper with a deceased president gazing into the great beyond. Some banks even allow you to customize the colour and graphics on your credit and debit cards.

Debit and credit cards also offer the advantage of security. With them, you need a signature and/or a PIN number to access your funds. Cash is only protected by your ability to defend it should someone want to take it from you.

Except for the odd country store, plastic is accepted in as many places as cash is. Yet cash is almost always the better choice for making a purchase. Here's why:

Overpaying

One of the drawbacks of credit and debit cards is that they encourage you to spend more than you intend to by giving you easy access to more capital. With cash, spending more than you intend requires going to a bank or ATM, then returning to the store to complete your purchase. This provides time to reconsider whether your budget can handle the extra strain.

Carrying only the cash you are prepared to spend on a given product can prevent you from 'buying up' and paying for features you don't need. This works for minor items, but buying a boat or pickup truck requires more cash than you may be comfortable carrying on you. If a cheque can't be used, a debit card is better than a credit card because you can only spend money you already have.

Over-Shopping

Cards won't just lead you to pay too much for single purchases, they also encourage you to buy more items than you mean to. Stores build displays to make their wares appealing so that you will purchase more. In some cases a checklist is insufficient in preventing impulse buys.

People tend to spend more with credit cards than with cash. One study found that people spend up to 18% more when using credit cards, and McDonald's notes that average purchases rose from $4.50 to $7 when customers used plastic over cash.

Only carrying enough cash to buy the things on your list is the best way to shop within your budget. If you take the time, you can find sales or inexpensive alternatives to your regular brands to make your cash go further.

Cash Vs. Credit

For the purpose of this article, cash means money you have already earned. Using your Visa for a cash advance does not solve the problem of using high-interest debt to cover your expenses.

Cash has one clear advantage over credit cards: if you carry a balance on your card, or only make the minimum monthly payment, you will incur interest at a rate of 15% or more on your purchase. This means paying $15 or more for every $100 you spend. If you save enough cash for the same purchase, you give yourself the equivalent of a 15% discount by not using your card.

Cash Vs. Debit

If we just portrayed cash as a better alternative to credit cards, few would argue against us. In contrast, debit cards enjoy a protected status, despite ATM fees.

A debit card can also trivialize purchases. Being a square of plastic, it is difficult to tell how much money is spent through your debit card. It becomes a matter of $2 here, $6 there and so on until you give up tracking how much you spend. It's a shock when the monthly statement comes. With cash, you can monitor your funds as you spend.

Conclusion

Using a credit or debit card offers more security than cash in most cases. For large purchases, cash is often not an option and writing a check or getting a bank draft may be more trouble than it is worth. In addition, a properly used debit card can be a great alternative to cash instead of resulting in credit card problems.

A credit card can also be a convenient tool, but it's only a fair substitute for cash when your balance is paid in full at the end of each month. Otherwise, your reward for convenience is debt.

If you tend to overspend, shopping with cash is one way to adhere to your budget and limit impulse buying.

It's funny the false sense of security that green money holds. It's not resistant to water, fire, or wind. It rips easily and is easy to lose in a crowd. If you don't keep both eyes on it, it will disappear. If you stack it up very far it will tip over and land in a messy pile at your feet. It smells funny.

Yet those with lots of it feel they hold the magic wand.

If I sauntered up to you and said, “I'd like to give you this crispy new $50 dollar bill for the sweater you're wearing,” you'd look at me funny. You'd definitely think about it, because you know you just bought it last week for $35 and can go right back to that same store tomorrow and get another one if you sold me yours.

But, if my brother walked up next to me and said, “I'd like to give you $50 right now, and then $1 per day for the next 7 days,” you'd look at him, you'd look at me….and you'd hand him your sweater.

The same holds true with people who think that paying cash for a car will get them a better price from the auto dealership.

You walk in with $10,000 cash and make an offer to hand over your sack of money for that car over there, which lists for $13,595. Sounds like a good deal to you. The dealership gets paid their full amount right now, today, and that's that.

Meanwhile, another person walks in with an offer to pay the exact same amount for the exact same car. And they sell him the car, not you. How the heck did that happen?

Let's compare the two of you. That guy had perfect credit. So do you. That guy had a $10,000 offer, so did you. That guy needed financing. You didn't. Does that really matter? You bet your daisies it does.

Here's how:

That guy wanted to pay $10,000 for the car. That is the price they listed on the contract. His credit qualified him for the best interest rate available. For example purposes, let's say 6.5%. But, this guy didn't know what rates he qualified for, so he agreed to pay 8.9%. He also didn't know the exact math on what his payments would work out to be, but he had budgeted about $250 for his car payment. They shook hands at $246.

Back in the finance office, they were able to give him an extended warranty, GAP and Life & Disability Insurances which only raised his payments $3. He left, ecstatic with his new car warranty and with payments of $249 a month.

So, why did this guy get the car for $10,000 and you didn't? Let's do the math:

· Financing $10,000 at 6.5% for 60 months is a payment of $195.66.
· Financing $10,000 at 8.9% for 60 months is a payment of $207.10, a difference of $11.44 per month.
· Over the 60 month contract, that is $686.40 that goes right into the dealership's pocket.

But he didn't have payments of $207.10, he left happily at $249. Well, that extra $41.90 times 60 months equates to $2514 in products and profit that the finance manager was able to sell him when he signed his paperwork. That is why he was able to get so many “extras” for such a little change in payment.

Let's just say, for math purposes, that the products that the F&I guy sold him had a hard cost of $1500. That left $1014 in profit, PLUS the $686.40 of profit from the extra interest rate they charged him. On a $10,000 car, on financing ALONE, the dealership made $1700 profit. And we didn't even go into how much they owned that car for to begin with.

So, the next time you think that paying cash speaks louder than payments, think again. The dealership is watching out for their bottom line, and they know all the tricks to getting the most out of every customer. There's no magic wand that can protect you from that, no matter how hard you wave it in front of them. Without knowledge and a little due diligence, you can assure yourself the same destiny as that fragile pile of green paper lying there in front of you.

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