Financing a car vs. paying cash for an older vehicle

Let’s say you have $5,000 available to purchase a car, and you need it right now. You can technically afford to add a monthly payment to your finances, but of course that will take away from the amount you’re able to save each month.

You need to decide whether you want to use that $5,000 as a down payment for a financed car or use it to pay cash for an older car with a lot of miles on it.

Let’s look at some of the pros and cons of each:

Paying cash for an older car


  • No monthly car payment
  • More money to put toward savings
  • Lower insurance rates
  • Lower taxes


  • Higher maintenance fees
  • Unreliable
  • It’s a gamble. You may drive it for years with no problems, or the engine could die and leave you without a vehicle a few months later.
  • Depending on the age and type of vehicle, gas consumption is likely to be higher than a newer car.

Financing a used car


  • Certified cars come with warranties that promise reliability.
  • Less likely to have problems soon


  • Still a gamble. You don’t know how the previous owner cared for the car, so you could end up with a car payment and high repair costs.
  • Higher financing interest rates than brand new vehicles

Financing a new car


  • Guaranteed reliability through warranties.
  • If you’re the only owner, you can care for it diligently and drive it for 10+ years.
  • Possible tax incentives on cars with better gas mileage.
  • Lowest possible interest rates for financing.


  • High monthly payment.
  • High taxes.
  • High insurance rates.

I don’t really have an answer. To me, it’s a toss-up, and used cars are a gamble. You might save a lot of money, but you’ll end up funneling it back into the car for repairs. We haven’t decided what we’ll do for our next car, but we’re leaning toward financing a certified used car.

Here’s why:  I drove a lot of old beaters in high school and college. My dad is a relatively good mechanic, so this wasn’t a problem in high school. When I broke down, he’d pick me up, and get my car running again. But in college, I ended up stranded a lot with no choice but to tow my car to a garage and charge the repairs on a credit card. Ouch.

When we moved to North Carolina, Tony and I made the decision that we’d rather share one new, reliable car than have two unreliable beaters. So that’s what we did. And I don’t regret it. We bought a reasonable economy car, but it was brand new. Yes, there’s a payment every month, but I’d rather pay a car payment every month than wonder when I’ll be stranded again by a breakdown.

Many personal finance bloggers will say, “Yes, you’re likely to pay for repairs on a used car, but it still won’t add up to the amount you’ll lose in depreciation and interest on a financed car.” That’s true. But honestly? It’s not about the money for me. There was absolutely nothing I hated more than breaking down at a stoplight or being stranded in the cold after working late. I’d rather pay 100 car payments than deal with that again.

What about you?

Photo by smcgee

7 thoughts on “Financing a car vs. paying cash for an older vehicle

  1. ctreit

    My only used car was my first car. No, wait. I bought another used car for commuting once, but I only owned it for a week since it was a piece of crap. It did not even hold out for a week! Other than that, I have only bought new cars for a reasonable price and I have kept each of my cars for at least 10 years, when many of them ran into mechanical problems or were pretty beaten up. Sometimes I have even donated my very old and very used cars.

  2. Sarah F

    It’s a toss up for us too. We are currently driving a 19 year old Honda, and a 10 year old Saturn, and contemplate almost everyday what our next move should be. Right now, we are paying the “car note” to ourselves each month to our car fund. It could be a month, or year from now when we’ll need/want to use that money for our next car. We’ve debated going with the $5,000-6,000 used car, and pay in cash, vs. the $12,000-13,000 1-2 year(s) old used car route.

    The real decision maker for us to go for the newer (and probably financed car) was the ability to take road trips without having to go rent a car. For the last 2-3 years, every trip over 3 hours from home, and every time my husband went out of town for business, we’ve rented a vehicle. We didn’t want to put the wear and tear on our vehicles, nor wanted the headache of something happening while away. If we didn’t like to travel as much as we do, and my husband didn’t travel for work, we’d probably go the older car route.

    Our plan of attack now is to just keep saving for as much down payment as we can, and keep nursing along the cars that we have. And wait and see.

  3. This Thrifted Life

    I have bought used cars in cash and now have a car payment. I much prefer purchasing cars that are a few years older with cash than having to deal with a payment every month. Running carfax reports and buying from owners who have meticulously taken care of the vehicle have been beneficial to me. My husband drives a 14 year old car he bought off his grandparents, who kept it in immaculate condition. It runs better than my newer car! One we pay off my car this spring, we plan to save the payment every month so we can pay cash for a newer car in a couple of years. You’re right–it definitely depends on what matters the most to each person.
    .-= This Thrifted Life´s last blog ..Thrifted =-.

  4. jonathanwthomas

    You really can’t win when it comes to cars. I recently added up all my costs associated with having a car (payments, insurance, gas, parking, tolls, maintenance) and it added up to something slightly less than half of my income. I spend almost half of my income just to get to work. There is something seriously wrong with that equation. I have a ‘new car’ but it’s 3 years old now and last year it had a major mechanical problem that had to be fixed that was quite expensive. Thankfully no other problems. We paid off my wife’s car some time ago and that was extraordinarily liberating. At least until it needed it’s plates renewed and it failed the emissions test and cost $1300 to fix (that’s what we got for Christmas).

    Frankly, I’d rather be living in a place where I didn’t need a car. I am lucky in that I’ve always had a reliable car – but that cost a ton of money the whole way.

    If I were in your position, I’d either keep saving until I could pay cash for a newer used car or finance one.

    If I ever had to get a ‘new’ car again, I think I would lease one. Owning a car is a crapshoot of a deal no matter how you spin it.
    .-= jonathanwthomas´s last blog ..Prince Harry Does His Part for Haiti Too =-.

  5. Kacie

    Hmm. Ok, to preface my comment, my car is a 2006 and I am the original owner. So it was new when I got it, and now it’s going on four years old. I only drove beaters when I lived with my folks.

    So far, the car has been pretty durn reliable, but the clock is starting to tick on it. My parents wanted me to get a brand-new car because if it had problems, I wouldn’t know what to do with it. Looking back, I wish I got one that was a few years old so I could save oh, I dunno, $8-10k.

    How often do you plan on replacing your car? Every 5 years? Every 10?

    Because if you only want to drive a newish car, it’s going to be a very expensive proposition for your entire life.

    You don’t HAVE to finance your next car. You could save for it. We’re shooting for $8-10k for car #2 and hopefully it’ll only be a couple of years old. Ideally, we won’t have to take a loan out on it.

    I think you could scrape that kinda cash together if you had long enough, yeah? I mean, Europe and your e-fund came together rather quick.

    I’m not saying you should ever drive a beater again. I hope you never do! But newish cars still can leave you stranded. Dead batteries, flat tires, and worse happen to the best of ’em. Buy a AAA membership if it gives you peace of mind, or look into an extended warranty perhaps.

    And, I still think that even if you finance a car, you should consider paying it off as quickly as you can. Get that debt snowball rolling! What do ya think?
    .-= Kacie´s last blog ..Viewing Netflix on your Wii or other systems =-.

    1. Karen

      Kacie – We haven’t made a decision. Ideally we’d like to save up $10,000 for a new car, but I was mostly just posing the question for the heck of it. I would LOVE to pay $10,000 cash for a car! We’ll see how much we’re able to save, though!

  6. Ben

    Someone should run some numbers and compare the options you proposed, except do it over a lifetime. What is the long term finiancial difference? I read an article once about the best age to own a used car (see link) What if you took two 20 year olds who each wants to buy a car; both have $3,000. Kristie buys her car with her $3,000 cash, and Ben puts his cash as a down payment on a car to buy on credit. Every five years for 60 years (from age 20 to 80) they both replace their car. Each time, Ben buys on credit, and Kristie pays cash. Both Ben and Kristie have a $200 / month car budget. Kristie is saving it; Ben is using it to pay off a loan. WHAT IS THE DIFFERENCE? Factor in insurance differneces you mentioned, interest paid, interest earned in a 401k, repairs, valuation, devaluation. A friend says the difference is over $1,000,000 – buy he can’t put his fingers on the calculations.

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