Is It Suspicious To Buy A Car With Cash?
While most of us are not lucky enough to have 10 to 15 000 dollars available in cash to pay out in cash in one go, some people are. However, there are some reasons why it is suspicious to buy a car with cash.
Getting any high-ticket item with cash can mean one of two different scenarios.
- One is literally paying in cash via a briefcase full of money like a fancy mobster or any criminal worthy of prime-time TV.
- The other (and more common) implication is that you are buying the asset without any financing. This means that you are paying through cheque transfer or bank transfer.
The second scenario is not so farfetched and buying without any loan or financing is not as rare as we less financially strong people would like to think. But the practice of financing assets like cars is there for a reason, and many car dealers may not like receiving payment in cash upfront.
Car dealers make some money on every car that they sell. And they get to make a little bit more on financed vehicles.
Nowadays the financing of vehicles is usually done by the car manufacturers and is available for people with a good credit score and repayment history.
For buyers with weak credit or maxed out credit lines, there is the option of car financing through whichever bank the dealer is banking with. The loan would be more expensive, and the dealer will get a commission or kickback from your loan. This is not illegal, by the way.
Why Cash is Suspicious
Cash is not bad in itself but paying in physical cash has suspicious activity written all over it. This is very likely to make dealers nervous about how you got so much money in ready cash.
Buying any asset with cash has suspicious connotations, mainly as it is difficult to trace the sources of the money.
Comparatively, paying through your credit card means that the transaction can easily be traced. This leads to a level of confidence between buyer and seller and helps remove the following risks:
- Chances of counterfeit currency. There is always a fundamental threat of fake notes being present in large sums of money. This is the main reason most people are reluctant to accept and process large sums of money in physical form.
- The chance of the money being sourced through crimes like drugs, extortion, and other criminal activities.
- The threat of money being sourced through money laundering or layer schemes.
Cash is no better than a cheque, and the only thing that bringing a large amount of money will do is make the dealer nervous that you are dealing in counterfeit, stolen, or drug money.
It is an irony of our times that not having enough money is expected and considered better than having enough money.
Suppose the dealer gets up to $10,000 in one or several transactions. They must report details of the deal to the Internal Revenue Services by filling out form 8300. This creates additional processing and reporting for the business.
Logistics of Cash Management
Paying in physical cash also has management problems. Since it is rarely done, most dealers will not have the capability to store, count, or handle large sums of money.
Large deposits are usually through bank transfers, so that special cash services will be needed.
While dealers may have a safe on their premises, it will probably not be enough in terms of size and strength to handle cash.
These are all risk prone situations that most large car dealers will not be comfortable with. Since dealers make money on the small items, like warranty extensions, paint touch ups, seat material protection, alarm, and music systems.
So having to pay more to manage your cash eats away their profit margins and makes dealers unhappy.
The Business Model for Car Dealers
The easiest way to understand why paying in cash for a car is a bad idea is to know how car dealers earn their profits. By selling the car, most dealers make a profit, which reduces their loss on a used car standing depreciating in their lot.
The older cars have higher maintenance and service demands, which demands you spend money, which goes to the dealer’s mechanics. If you finance the car, the bank pays the dealer a commission
There are three different phases of a car transaction:
- The actual buying of the car
- Trading in an existing vehicle
- Financing the car.
Forget about seeing a dealership as a one stop shop to get a good bargain. The dealers' sales representatives will be looking to hook you in to squeeze the most profit out of you.
The trade in margins will be enhanced, the new car price will be improved, and financing will be pushed so that the dealer can make money from all three angles.
Since the sales reps get commissions, they are fully pumped to do their best to get a better deal for their dealership.
Similarly, there are various reasons why car dealers are not okay with accepting payments via a debit or credit card- There is a transaction fee for large amounts that the dealer must bear, which eats away at their profits from the sale of the car.
- There is a restriction on the number of transactions that can be done in a day on a card
- There is a delay between the transaction and the time money arrives in the dealer account. This is the time taken to process the funds from the card merchant to the specific bank. This delay can be problematic for the dealer.
- There are loopholes in the payment refund policies of credit and debit cards, which affects the payer and negatively affects the car deal.
Why Financing is Important for Car Dealers
We all know that we pay more when we finance an asset as compared to paying up front. This suits dealers because they get to earn a kickback from the bank where you are getting financing from.
In addition, the series of set installments means that the dealer is set to receive a set of cash payments over a few years. This means that they know they will get paid x amount for x number of years. This is great from a business finance perspective.
In comparison, getting paid in one go and cash is not attractive due to various factors:
- Most dealers do not have the capacity to handle cash physically
- Physical money has its own set of negative associations and legal issues.
- Since car financing is more lucrative for dealers, they will not make it easy for buyers to pay in cash because they lose out on commission and long-term cash benefits.
What Should Cash Rich Buyers Do?
People on the other end of the debate says that it doesn't matter how a car is paid for, and while dealers earn from financing, nothing stops buyers from financing the car and then paying it off early.
High-end car manufacturers, in particular, give out rebates to their buyers, but the catch is that only financed vehicles are eligible for the rebate. Rebates can be as random as rebates for fresh graduates to military rebates.
Most dealers end up advising their buyers to get financing, for the time being, wait for a few good cash rebates and pay off the car after that, saving a few thousand dollars. The bottom line remains, don’t buy in cash upfront.
Another argument most dealers and their reps come up with is that in case of paying through checks or bank transfers, the dealership will still require credit checks to ensure that the check will be cleared and will not bounce.
Paying cash is inconvenient for the dealership and expecting discounts because of cash or full payments is unrealistic as the system is just not designed to support this.
Dealers encourage their cash-rich buyers to opt for early payment after getting financing. This allows dealers to book their commissions and follow set credit patterns and will enable buyers to receive rebates and perks that will allow them to save money.
Even if the manufacturer has early settlement penalties, these are less than any rebate given and the overall savings that the buyer would make buying through cash.
The Accounting Advantages of Buying Using a Loan
Paying in cash for a new car can prove to be the wrong decision. This is because the vehicle will devalue over the medium term (three to five years), and paying cash for such an asset does not make financial sense.
The decision to buy needs to a car needs to cover the following points:
- Do I have to buy a car, at what price, and how should I fund this?
- Pay cash? Or take a loan out? And how much loan? Will my existing (if any loans) be affected?
Cash-rich buyers need to accept that cash payments are not worth the hassle they cause for everyone involved.
They can get a loan for their new or slightly used car and make sure that they get a reasonable rate and early penalty-free loan.
These two elements in your loan will allow you to pay off the loan early and not be charged a higher rate for it.
Make a practical buying decision based on how much you will use the car. Get the cheapest car and one that is economical in running and won't drive you over budget in fuel and maintenance expenses.
Disadvantages of Buying a Car in Cash.
Some disadvantages of purchasing a car in cash include the following:
- Doing this can eat up all or most of your saved money, and many are left with no savings to manage car maintenance or other emergencies. Lack of emergency money is a significant problem. So if you go ahead with paying in cash, make sure to leave back two months’ worth of spending money for emergencies.
- A significant opportunity is lost since you are losing out on investment options by paying for the car (which can be easily financed). As a debt-ridden student, paying some down payment and getting your car financed makes more sense. You can use the rest of your cash to pay off a chunk of your student loan and reduce your debt burden.
In short, if you are a young adult, you probably won’t have enough money saved to both buy a car and have money left over for emergencies.
You need to have cash left over for employment periods, emergencies, health issues, etc. paying in cash for a car ties up your money unnecessarily.
Car Depreciation
Cars have the high rates of depreciation, and they depreciate faster than other assets due to their running and maintenance requirements.
The more expensive cars depreciate at a higher rate and therefore lose their value quicker too. The first year of use is the most costly as the value declines the most,
Guidelines to Buying a Car with Cash
All the pros and cons and practicalities aside, getting a car through cash payment is the most simple way to pay for the car.
Doing this helps people bypass the many calculations and assessments needed while finalizing car loan terms, interest rates, credit card limits, repayment plans, and other fine tuning required for a financing deal.
Follow these guidelines to improve the process of paying for your car while paying cash:
1. Identify a Reputable Dealer
Finding a dealer that has a strong reputation can help you get a better experience in terms of easier dealing, better trained sales reps, and an overall smoother transaction and follow ups.
You can shortlist a few top dealers in your locality by visiting their websites, customer reviews, ratings, and word of mouth.
2. Negotiate Price Effectively
Regardless of paying in cash or credit or through financing, you can only negotiate when you are aware of the current market rates and car information.
Do some research into the car type you are looking for and shortlist the models and brands that fit your requirements.
Secondary research like reading car reviews, articles, and journal entries will help you figure out what you would prefer.
Then would come the primary research process of window shopping at car showrooms and even test drives to get a fair overview of what you want, giving you the confidence to negotiate both price and additional perks effectively.
3. Keep evidence of payment.
As a matter of practice, always keep all receipts and invoices as evidence of payment and billing. This holds true for car dealer payments as well.
Having a clear record of all financial dealings will allow for a clear financial trail and will be a support in case there is any problem with your car or payment records in the future.
This paper trail will prove to be very important if you are going to pay in cash. You also need to get a sales agreement to record the date you get the car and trace the previous owners if there is an issue with the car.
Dealers need to get their 8300 form filled in case of cash payments and need to submit it to the IRS.
If they don’t offer this form, they can be penalized several hundred dollars for every reporting they miss.
The Bottom Line
It may make perfect sense both financially and practically to buy a car with cash as a buyer. However, there are specific problems and risks involved, most of which will affect the car dealer in terms of regulatory,financial, and legal issues.
As a matter of practice, payment and transfers of large sums of cash are seen with suspicion, and issues of counterfeit notes, money laundering, and criminal sources
However, there are specific risks involved in the process.
First of all, the payment of heavy amounts can be risky in terms of security, fake currency, difficulty in tracking the source of money, and the risk of money laundering. In addition, where most dealerships don’t need to file significant reports to regulatory authorities, the receipt of cash requires filing a specific form to the Internal Revenue Service (IRS).
This requires sharing information like the parties involved, amount, and payment sources. Failure or a simple lack of knowledge in this regard can result in both penalties and reputational loss for the business.
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