Choosing your next car is not an easy decision. What make and model do you fancy? How does the interior look? Are you going for used or new? Maybe even an electric vehicle? That's before you think of the amount you wish to spend and how to pay for it.
While many look for style and speed, others look for affordability and value, so arguably the most important factor to consider is how you want to pay for it, whether with cash or on a finance plan.
There are benefits to paying with cash and taking out finance that we will go into more depth shortly. Picking the right option can be the difference in saving thousands of pounds throughout an agreement.
Do you already have a car on finance? Get your free appraisal today and discover whether you could be eligible to switch or save money on your vehicle.
When it comes to car finance, there are three main options available. Personal Contract Purchase (PCP) and Hire Purchase (HP) are the two most popular, while Personal Contract Hire (PCH) has increased in desirability in recent years.
There are pros and cons to all three car finance options that we have previously discussed. Of course, if you didn't want to finance, you could pay outright with cash. Let's dig into that option first.
Buying a car with cash
A car is one of the most expensive things you will ever purchase, so it's advised to only buy with cash if you have a significant amount of savings and will have some leftovers once the car has been bought.
It's easier than buying a car on finance, of course. Once you hand over the money, you own the vehicle outright and don't have to worry about making any monthly repayments or paying any interest.
You won't tend to find as many deals if you are buying a new or nearly new car with cash, and that's because dealers and lenders favour people buying on finance. However, you may be able to find pre-registered vehicles with less than 100 miles on the clock for some value.
Buying a used car with cash may be where you find the best deals and value. The reason is that used car finance isn't as competitive as new car finance, and the APR is generally higher.
It's worth doing research ahead of buying a car on where you will get more for your money. Compare the total amount payable for the finance scheme with the total cash price of the vehicle.
Pros of buying a car with cash
- You own the car outright immediately.
- No contracts or interest rates.
- It doesn't matter how many miles you drive or wear and tear on the car.
Cons of buying a car with cash
- You have to sell it yourself in the future.
- You will likely be using most, if not all, of your savings to pay for it.
- Buying a new car will be out of most people's affordability with cash.
Buying a car with finance
Car finance can be overcomplicated and is quite broad in what you can do and how you can do it. The key point for most people is whether you own the car outright in the end. On a PCP deal, you are required to make a balloon payment if you wish to own it, while on an HP, once you've made all of the payments, it's yours. On a PCH, you never own it and hand the car back once you've made all the agreed monthly payments.
The main difference between PCP and HP is at the end of your PCP, there are three options.
- Pay the final balloon payment to own the car outright
- Hand back the vehicle and pay no more for it
- Refinance your deal to keep the car, extend the term, and reduce your monthly repayments.
An HP finance deal is easier to understand. You borrow the total amount of the car's value, and once you've made all of the monthly repayments over your agreed term, you then own the vehicle outright.
Like a PCP, you put down an initial deposit- generally more than a PCP of 10%+ - and agree on a length of time you want to make your fixed monthly repayments, and once you've made them all, the car is yours.
Your monthly repayments are likely to be more on an HP deal because you're paying the total value of the car throughout the deal. Whereas on a PCP, you’re paying a deposit, making fixed monthly payments, and then you can decide whether to buy the car outright with a balloon payment.
If you're someone that likes to switch cars every few years and aren't necessarily fussed about owning one outright yourself, you might want to consider a PCP deal. If you know you want to own it at the end of your agreement, an HP works better.
Pros of buying a car with finance
- Get a better, more expensive car
- The cost gets spread out
- Fixed monthly payments so you can budget and plan ahead
- Improve your credit score
- No hassle of selling it on
- Use your car as a deposit or part exchange to get something new
Cons of buying a car with finance
- Have to pay interest
- Unable to make any modifications to the car
- Restricted by possible mileage and wear and tear fees
Buying a car with cash v finance
Only you can decide what option is best for you. Someone may be looking for the cheaper option, while someone else may want the no-strings-attached that comes with buying with cash.
If you have plenty of savings and can afford to pay in cash, it could save you money in interest repayments. However, savings are invaluable if the worst happened and you lost your job or had to pay for something in an emergency, so you should ensure you have plenty of extra savings just in case.
For us, finance is the preferred option. It offers greater flexibility and allows you to control what you want, how long you want to pay it off for, and whether you own it outright at the end.
You can also switch to brand-new cars every few years, which helps improve your overall credit score.
Work out what is best for you, and you will soon be behind the driving seat of your new vehicle.