So you’re in the market for a new car but you’re a little stuck on whether you should finance or just purchase outright. First of all, let us point out that if you’re considering paying cash to buy a car, we’re going to assume the car’s value is less than £20,000. This is because the average price of a car which is purchased in the UK is between £12,000-£28,000 and research shows that upwards of £20,000 is where finance is introduced the most.
There are benefits for both of these payment methods but let us stress now, that if either of these methods for buying a car puts you under financial stress (whether that’s having a large monthly bill that leaves you hungry for a few days at the end of the month or emptying your savings and having no safety blanket should you incur a large bill) it’s not worth it. Always find an affordable solution, no matter how you buy a car.
If you have bad credit you might consider paying in cash, but see the below for more information about how car finance can sometimes be a benefit to you.
Benefits of financing a car
Just because you’re choosing to finance a car doesn’t mean there’s no initial down payment to make. A lot of garages and car dealerships will expect a deposit. This might be your old car, it could be a couple of thousand pounds, or even just a few hundred. So don’t expect to walk in there and pay nothing until your first month is up.
One of the biggest benefits of financing is that you can afford a better quality car. For some of us, there is no chance of buying a vehicle for £10,000 without finance, but it has all the safety aspects that you need and the gadgets you want. Paying monthly allows you to get a better standard if it’s something you can’t afford outright. That being said, you still need to be able to afford those monthly instalments to be prepared for that.
A second benefit to financing a car is that you can grow a decent credit rating from it. Paying a regular monthly payment helps to boost your credit rating, and if you pay it on time each month through a direct debit, that’ll have a positive impact. Especially if it’s an affordable bill. This means in the future, when you go to finance something else, you’ll have a better chance of being accepted.
This next benefit is a little more complicated because it’s to do with the type of financial arrangement on offer. There are a few ways to finance a car. A hire purchase agreement will allow you to make payments where you then own the car. We would say this is a mirrored outcome to buying a car in cash – the reason to use this type of finance would be cash flow issues. You can afford the car, just not instantly.
Another type of finance agreement is called a PCP (personal contract purchase). This type of finance is different because after you make the final payment on the car, you don’t own it. Instead, you have the option to trade it in for another model or pay a balloon payment and then keep the car. The price of a balloon payment can vary, but it’s usually in the thousands. Now, we know what you’re thinking – why would you choose a PCP?
You would choose a PCP if you had no intention of keeping the car. This might be because you drive a lot of miles in a year or you just enjoy a new gadget every few years. The balloon payment allows you to purchase the car should your circumstances change for better or worse. You may stop driving lots of miles each year or you might get a raise which means you can afford the balloon payment after having a smaller monthly bill compared to the hire purchase.
These are the biggest benefits of buying a car on finance. They can seem appealing but it’s important to remember that a decision to finance a car can last years, and not just beyond the initial agreement. Three plus years of the same car, only to not afford to get out of your PCP arrangement, means you could be financing cars for over a decade unnecessarily. So let’s talk about buying in cash and those benefits.
Benefits of buying a car in cash
The biggest one is pretty obvious. You own the car outright and instantly. It means that there’s no credit check to take place, no financial agreement to sign, and you could be in and out of a car dealership within a few hours – no waiting a few weeks for your car. It’s as simple as going to the shop and buying a yoghurt. It’s certainly the fastest way to get a car and the least amount of hassle.
Another benefit to buying in cash is that there aren’t any limits put on how you use the car. A car on finance will usually have a mileage allowance per year. For some people, this may not matter, but for those who commute in their car and enjoy taking family trips at the weekend, it might be a dealbreaker. Typically dealerships will be hesitant to allow over 18,000 miles per year on a finance agreement. Now, we don’t know about you but if you’ve calculated your usage for a year, 18,000 isn’t exactly the luxury it seems for a family person commuting an hour to work five days a week.
Possibly the biggest and most important benefit of paying in cash is that you get the cheapest deal. Buying a car at the listed price in cash means you don’t incur any interest fees. Something which could have you paying a few extra thousand on the agreed price of the vehicle. There are deals out there which offer interest-free finance agreements but they are very few and far between and often, it’s not for a great car. It’s a ‘you get what you’re given’ type of deal.
Now you know the benefits of buying a car on finance and cash, it’s time to weigh up what’s best for you. Remember the most important factor is affordability.