You’ve decided the time is right to buy a new car, but you’re not so sure how to pay for it. There are several options to cover a car purchase, including paying with cash, an auto loan, a personal loan, or a credit card.
Paying for a car in cash could save you from borrowing a loan and paying interest charges. Meanwhile, financing your vehicle with a loan could be a good option if you don’t have cash and qualify for a reasonable interest rate.
There’s no one-size-fits-all approach when buying a car—the right option all comes down to your personal finances. Read on to learn how to pay for a car, along with tips for determining the best financing decision for you.
In this guide:
- How to pay cash for a car
- How to pay for a car with an auto loan
- How to pay for a car with a personal loan
- How to pay for a car with a credit card
- How much should you pay for a car?
- Does a trade-in affect how you pay for a car?
- What other costs should you expect when purchasing a vehicle?
How to pay cash for a car
If you can pay for a car in cash, you won’t have to worry about applying for a loan. You’ll purchase the car outright and enjoy full ownership right away. This approach isn’t realistic for everyone, but if you’re considering it, here’s how to pay cash for a car.
1. Save money
Kick off the process by setting a savings goal and determining how much you’d need to save each month to hit it. If you want to purchase a used car for $12,000, for instance, you could save that amount in three years by setting aside $334 per month.
Review your budget to determine a realistic savings goal for you. Looking over your income and expenses will also help you identify areas where you can save. Cutting down on restaurants or canceling pricey subscriptions, for instance, may help you save more for your car purchase.
Increasing your income can also help you meet your savings goal. If you can work toward a promotion or take on a side hustle, you could make more money and hit your savings goal faster.
2. Shop around for the right car
When you’re in the market for a new car, shopping around and comparing your options is always a good idea. Test drive cars at multiple dealerships or explore options from private parties.
By doing your research, you’ll better understand a reasonable price for your target car based on make, model, and mileage.
3. Negotiate price with the seller
There’s almost always room for negotiation when it comes to the price of a car. If you’re paying in cash, the car seller may offer more flexibility since you’re a serious buyer.
Before you start the negotiation process, do some research on the market value of the car. If you’ve found a lower price elsewhere, it could be worth asking if the dealer can match or beat it.
You could also point out any issues you found with the car so the seller can reduce the price accordingly. Be calm and polite in negotiations, but be prepared to walk away if the offered price doesn’t match your budget.
4. Purchase your car
If you’ve negotiated a price you’re comfortable with, your next step is completing the purchase. If you’re purchasing from a dealership, you may be required to pay with a cashier’s check. You can get a cashier’s check from your bank, and you may incur a fee of $10 to $20.
Some dealers also accept debit cards. If you’re going this route, notify your bank so it doesn’t flag the high amount and delay the charge. A private seller may accept a personal check or cash, but this will vary by seller preference.
You won’t lose money on interest charges.
You won’t have to go into debt to buy your car, meaning you won’t have to make monthly payments or spend hundreds (or thousands) of dollars on interest.
You’ll gain full ownership of the car right away.
When you borrow a car loan, you don’t fully own the car until you’ve paid your loan off in full. Buying in cash means the car is yours from the get-go.
You might get leverage in negotiations.
Since showing up with cash shows you’re a serious and motivated buyer, the car seller may be more flexible in negotiating price.
You may have to save up for a long time.
Buying a car in cash is not realistic for everyone, especially if you immediately need a new car.
You could miss out on 0% financing opportunities.
Some dealerships offer 0% financing to qualified borrowers, which lets you spread out your car payment over time without paying interest on the amount.
You might drain your emergency fund.
Buying a car in cash could drain your savings account, leaving you vulnerable if an unexpected expense pops up.
Your cash might have a better return elsewhere.
Rather than spending a large sum of cash on a car, you might have a better return on investment by paying down high-interest debt or investing that money in a 401(k), IRA, or brokerage account.
Should you pay cash for a car?
Paying cash for a car can make sense for consumers with enough cash reserves. Using cash, you won’t have to pursue a loan, take on debt, or waste money on interest charges.
On the other hand, using cash might not be a good strategy if you’ll be using all your savings. Keeping a rainy day fund on hand is good if you run into emergency expenses or lose your job.
In addition, if you owe a lot of high-interest debt, you might be better off using your cash to pay it off. For example, paying off credit card debt with a 15% interest rate is a higher priority than avoiding an auto loan with a 5% interest rate.
Finally, it wouldn’t make sense to put your retirement savings on hold while you save for a new car, especially if your employer offers a 401(k) match. Setting money aside for retirement each month will help you build a nest egg for the future.
How to pay for a car with an auto loan
You’re not alone if you’re considering taking out an auto loan to pay for a car. Auto loans accounted for the third-highest consumer debt in the United States as of 2021. If you’re wondering how to pay for a car with an auto loan, here are the steps you’ll need to take.
1. Decide how much you need to borrow
Review your budget to determine a reasonable monthly payment. An auto loan calculator can help you estimate the costs of an auto loan based on the loan amount, repayment term, and interest rate. If you can make a down payment on the car, you’ll decrease the amount you need to borrow.
Remember that a longer loan term will make your monthly payments more affordable, but it will also increase your long-term borrowing costs. If you can swing a shorter loan term, you’ll get out of debt faster and save money on interest.
2. Select the car and lender
Once you’ve found the car you want to buy, you’ll need to pursue financing. You have two options: financing through the dealer or directly from a lender.
It’s often a good idea to shop for an auto loan from a bank, credit union, or online loan company. By borrowing directly from the lender, you can often find a better rate and lower fees than you would at a dealer.
That said, it may be worth checking your options from the dealer to see how they compare. Some dealers offer 0% financing for qualifying borrowers, particularly if you buy a car around a major holiday.
As you compare loans, keep an eye on the annual percentage rate (APR), fees, and loan terms. A lower APR can save you money on interest. As mentioned, a longer loan term can increase your interest costs over time.
3. Apply for the loan
Some lenders let you prequalify for an auto loan on their websites, meaning you can check your rates without impacting your credit score. Once you’ve found a loan offer that works for you, you’ll submit a complete application.
You’ll provide your personal and financial details, along with any required documentation related to your income and the car you wish to purchase.
4. Purchase the vehicle and repay your loan
Once you’ve secured the loan, you can purchase the vehicle. Keep in mind that auto loans are secured by your car. If you miss payments, the lender can claim ownership of the vehicle as a form of repayment.
You’ll pay back your auto loan monthly over a set period. Making on-time payments will help improve your credit score, while late payments can damage it. Consider setting up automatic payments on your car loan so you don’t miss any bills.
You can spread out the purchase price over time.
An auto loan enables you to get a car right away. You won’t have to wait and save enough cash to purchase it upfront.
Your interest rate will likely be fixed.
Auto loans typically come with fixed interest rates, so you don’t have to worry about your car payments changing from month to month.
On-time payments will improve your credit.
Your payment history makes up 35% of your FICO score. As you make on-time payments on your auto loan, you may see your credit score increase.
You’ll pay interest.
Like most loans, you’ll have to pay back the amount you borrowed plus the interest that accrues.
You could end up underwater.
If you choose a longer loan term, you may owe more on your car than it’s worth. This situation could be problematic if you want to sell your vehicle and purchase a new one.
Secured loans can be risky.
If you don’t repay a secured loan, the lender can repossess your collateral. In this case, that collateral would be your car.
Should you take out an auto loan to purchase a car?
An auto loan can make sense if you get a reasonable interest rate. The best rates typically go to borrowers with the strongest credit scores. If you don’t have an immediate need for a car loan, it could be worthwhile to improve your credit before you apply for an auto loan.
Before you borrow, make sure you can afford the monthly payments. Review the loan’s APR, fees, and repayment term to ensure it meets your budget. Taking on a burdensome amount of debt for a car is not worth the headache, especially since cars lose value over time.
If you can get an auto loan at an affordable rate, though, this financing option could be the right one for you.
How to pay for a car with a personal loan
Using a personal loan to purchase a car is another option, as long as the lender doesn’t restrict using the loan for this purpose. Here are the steps you’ll need to take.
1. Determine your loan amount
Use a personal loan calculator to estimate a reasonable loan amount and monthly payment. Remember, increasing your down payment can decrease the loan size you need to borrow.
2. Choose your car and lender
Many personal loan companies let you check your rates online without impacting your credit score. Prequalifying for a loan enables you to compare multiple offers at once.
Review each loan’s APR, fees, and repayment terms to find one with the lowest borrowing costs. You can find personal loans from banks, credit unions, and online lenders.
3. Apply for the loan
If you choose to move forward with a loan offer, you’ll submit a full application. Most personal loans are unsecured, meaning they don’t require collateral.
Instead, a lender relies on your credit and income when making its approval decision. Some lenders let you apply with a cosigner or co-borrower, which may be helpful if your credit isn’t up to scratch.
When you apply, you may need to provide documentation, such as pay stubs or bank statements. At this point, the lender will run a hard credit check, which may ding your credit by a few points.
4. Purchase the vehicle
Most personal loan lenders will deposit the personal loan funds into your bank account. Then, you can use the loan funds to purchase the vehicle.
Check with the dealer or private party to find out how to provide the money. Most dealers ask for a cashier’s check.
5. Repay your loan
After borrowing the personal loan, you’ll start paying it back monthly. Personal loans often come with terms between one and seven years, but your options will vary by lender. They also usually have fixed interest rates, so your monthly payments won’t change over time.
Some lenders offer a 0.25% rate discount if you sign up for automatic payments.
You usually don’t have to provide collateral.
Personal loans are often unsecured, so you don’t have to worry about losing your collateral if you miss payments. However, late payments will damage your credit.
You can use a personal loan on almost anything.
If you need money for home improvement, debt consolidation, or another purpose, you could use part of your personal loan to purchase your car and the rest to cover your other expenses.
Some lenders offer terms of seven years or more.
Depending on the lender, you may have the option of spreading your loan out over several years, resulting in more affordable monthly payments.
The loan may have higher interest rates than an auto loan.
Your interest rate may be significantly higher on a personal loan than an auto loan, costing you hundreds or even thousands of dollars extra on your car purchase.
Qualifying for a personal loan can be challenging.
The credit and income requirements for a personal loan may be lofty. Even if you can qualify with subpar credits, your interest rate could be as high as 36% APR.
Should you take out a personal loan to purchase a car?
An auto loan is usually preferable to a personal loan because it usually comes with better rates and more lenient credit requirements. However, a personal loan could make sense if you can qualify for a decent rate or have other projects you need to finance, such as home renovations.
Since many lenders let you prequalify online, it could be worth checking your rates. A personal loan could be a good option if you find an offer that beats an auto loan.
How to pay for a car with a credit card
Some car dealerships let you buy a car with a credit card if you have enough available credit. Here’s how this works.
1. Select the credit card you wish to choose
You may need to apply for a new credit card or use an existing one with sufficient funds. Credit cards have a credit limit, so you can only charge up to a certain maximum amount and it is recommended to only use 70% of the total available credit.
If you open a new card, prioritize cards with an introductory period of 0% APR. If you can pay off your car purchase in full before this period ends, you won’t have to pay interest on the amount.
However, expect your credit card to come with high interest charges outside of any promotional periods.
2. Choose and purchase the car
Once you’ve researched your credit limit, your next step is choosing your car. Find out if the seller will accept credit cards as payment.
Some credit cards offer balance transfer checks you receive as a deposit in your bank account. You could use this money to buy the car, but be careful about high interest rates and fees.
You can also take a cash advance from your credit card, but this option may also come with high rates and fees from both your credit card issuer and the ATM you use.
3. Repay your credit card
Carrying over a balance on your credit card from month to month can rack up hefty interest charges. The average credit card interest rate was 15.4% in 2022, according to the latest data from the Federal Reserve.
To reduce interest charges and keep your balance from ballooning, pay off the amount as fast as possible. If your card has 0% APR for a limited time, figure out how much you need to pay each month to get rid of the balance before that period ends.
If your card has 0% APR for 15 months, for example, and you purchase an $8,000 car, you’ll need to pay $533.33 per month to eliminate the balance in that time frame.
Some cards come with 0% introductory APR.
If you can pay off the charges before this period ends, you can avoid paying interest on the amount.
You might earn rewards on your purchase.
You could earn points or cash back on your charges using a rewards card.
You can pay off the balance over time.
Credit cards offer the flexibility of paying back your charges over a long period. However, your balance could keep growing if you carry it over from month to month.
The card may charge high interest rates and fees.
Using a credit card to buy a car is usually not recommended due to high interest and fees.
The cost of the car may exceed your credit limit.
You may need more credit available to afford the car. Plus, not all dealers accept credit cards as a payment option.
You could hurt your credit.
Increasing your credit utilization—or the amount of credit you’re using compared to what’s available—can drag down your credit score.
Should you use a credit card to buy a car?
Using a credit card to buy a car is rarely a good idea because credit cards come with high interest rates and fees. An auto loan or personal loan is almost always the more affordable option if you need to borrow money to buy a car.
However, a credit card could make sense if you only need to charge a small amount and can take advantage of 0% APR financing. If you can reasonably afford to pay back the borrowed amount before this period ends, using your credit card could be a strategy worth considering.
How much should you pay for a car?
There are a few guidelines to know when considering how much you should pay for a car.
Car payments should be below 10 to 15% of your income
If you finance your purchase with a loan, keeping your payments to 10% to 15% of your monthly income is advisable. So if your take-home pay is $3,500 per month, for example, it’s a good idea to keep your car loan payments below $350 to $525.
Similarly, if you pay for your car in cash, the total shouldn’t be more than 10% to 15% of your annual income. For instance, if you make $50,000 a year, consider keeping your car purchase under $5,000 to $7,500.
This guideline ensures the amount you pay for your car fits your budget with all of your other living expenses. The more you pay for your vehicle, the less money you have to cover other financial obligations.
Remember the 20/4/10 rule of car-buying
With this approach, you make a 20% or greater down payment on the car, choose an auto loan term no longer than four years, and keep your monthly payments below 10% of your income.
Following this guideline can help you keep your monthly transportation costs manageable and aligned with your overall budget.
Ultimately, the amount you should pay for a car depends on your situation. You may need to minimize your car payments if you have several financial obligations. If you have plenty of room in your budget after paying other bills and saving for retirement, you could afford to pay a little more.
Don’t forget to consider other car ownership costs when determining how much you can afford. These include car insurance, gas, maintenance, and repairs.
Does a trade-in affect how you pay for a car?
If you want to trade in an existing car, you can use that price toward your next car. If your new car costs $15,000 and your trade-in is worth $5,000, for instance, then you’ll only have to pay $10,000 toward the new car.
You can use that money as a down payment on your new auto loan or, if possible, pay the difference in cash. If you still owe money on your current car, the dealer may pay off the loan and pay you the difference.
A problem can arise, however, if you owe more on the loan than the car is worth. In this case, you’ll have to pay the difference between the loan amount and the trade-in value. It may be worth selling your car privately because you might get a better price than you would from a dealer.
What other costs should you expect when purchasing a vehicle?
When purchasing a vehicle, there are some other costs you’ll need to cover apart from the car itself. These include:
- Sales tax: Most states charge a sales tax on the purchase price. Rates vary by state, but may range between 1.76% and 9.55%.
- Documentation fee: Many dealers charge a fee for processing your paperwork. This fee can range anywhere from $80 to $500 or higher.
- Car registration and title fees: The fee for registering your car, issuing a title, and getting license plates may cost around $50 to $200 or more.
- Car insurance: Your car insurance rate will vary depending on your age and the make and model of your car. The average rates in 2019 were $1,070 per year.
As a car owner, you’ll be responsible for costs related to maintenance and repairs of the vehicle. In addition, some states require your car to undergo a periodic emissions test, which is usually free, but you may be responsible for the necessary repairs if your car does not pass the test.