Buying a car, whether it's brand new or used, is an expensive purchase. Deciding how to pay for it largely depends on your financial situation - do you have the cash available to pay for it outright or do you need to take out a finance agreement?

In 2018, 1.4 million used cars were bought on finance - an increase of 8% from the previous year accounting for nearly a fifth of all used car sales. In contrast, the popularity of funding new cars through a finance agreement declined by around 4% in 2018 compared to 2017.

Cash is often seen as the preferred method to make a large purchase because it doesn't leave you in debt; however, it's not always possible, especially for an item that will cost several thousand pounds. Even if you do have the cash to buy the car in one go, it's not necessarily always the best option.

Buying A Car With Cash

Advantages

Disadvantages

One-off payment

Depreciating item

You own the car

No ‘nest egg’ for emergencies

Cheapest option

Could reinvest ‘spare’ cash if the car was financed

No mileage limit

Choice is limited by the amount saved up

You can sell the car at any time

 

Simple and straightforward

 

ADVANTAGES OF CASH

Buying a car with cash is a simple and straightforward process: you pick the car, go to the dealer or private seller and give them your money. You can then drive away with your new car without having to make any further payments (other than fuel, insurance, tax and maintenance). There's no credit check to worry about and no mileage limit to be wary of.

This one-off payment means that you can save money each month towards your next car, or another purchase, rather than making a monthly repayment to a finance company. You will also be saving money in another sense because you won't be paying interest. Paying for a car outright is by far the cheapest option available.

Unlike a finance agreement - where you don't become the official owner of the car until the end of the term - you will own the car from the outset, giving you a valuable asset. If your financial situation changes for the worse, you can easily sell the car at any time to a local dealer or national buying service (e.g. We Buy Any Car).

Similarly, when you decide to change your car, you can use it in part-exchange to get money off the value of your new vehicle. You are guaranteed to receive the full valuation of your car and won't have any money deducted for wear and tear or excessive mileage.

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DISADVANTAGES OF CASH

Unless you're buying a limited edition or classic model, every car will depreciate. Most cars lose 50% - 60% of their value in the first three years of ownership; this starts to slow down from year four onwards. If you decide to buy a brand new car using cash, you need to understand that you will lose a significant amount of money on this investment.

Used cars depreciate at a slower rate, but you should still expect to lose money when you come to sell it, particularly if you've owned it for more than five years and averaged 12,000 miles per year.

If you're investment savvy, or have a financial advisor that you trust, you could use some of the cash you saved up to put a deposit down on a car (instead of paying for it in full) and invest anything that's leftover. For example, if you have enough cash to buy a car worth £15,000, you could use £5,000 as a deposit on a finance agreement and invest the remaining £10,000 into stocks or a high-interest bank account. This is a potentially risky strategy because you can't be guaranteed returns, but it could pay dividends if you invest wisely.

By using all (or at least a large proportion) of your hard earned savings to buy a car outright, you won't have a 'nest egg' to fall back on in the case of a financial emergency (e.g. broken boiler or a sick pet).

Finally, the car you choose will be limited by the amount of money you've got saved up, so you might not be able to get the car you necessarily want. You can't expect to buy a three-year old BMW for £6,000; however, a limited budget will prevent you from spending beyond what you can realistically afford.

Buying A Car On Finance

There a number of different ways to finance a car, including PCP (Personal Contract Purchase), HP (Hire Purchase), Leasing, Personal Loan or Credit Card, each of which have their own advantages and disadvantages. The pros and cons listed below do not entirely focus on a specific finance method, but rather highlight the general benefits and drawbacks across different finance products.

Advantages

Disadvantages

Get a better car

Have to pay interest

Cost is spread out

Can’t make modifications

Fixed monthly payment

Can be difficult to get out of

Can be driving a car on a tight budget

Mileage fees

Improves credit score

Additional charges for damages

No hassle of selling it on

Car payments never end (if you start new ones)

Deposit contribution on new cars

Can negatively impact credit score

ADVANTAGES OF FINANCING A CAR

Research from AutoTrader revealed that 36% of car buyers took out a finance agreement because they couldn't afford to purchase a car otherwise. Although this might be a startling admission, finance products enable people to drive a car despite being on a tight budget. Saving up to buy a car with cash can take a long time, especially if you can only spare £50 - £100 every month; majority of people need a car to get to and from work so can't wait until they have enough savings.

Financing a car spreads the cost of an expensive item over several months making it more affordable. Before signing on the dotted line, you agree an affordable fixed monthly payment with the dealer or finance company that you can budget for each month.

Depending on your monthly budget and the deposit you're able to put down, you could get a better car than if you just use cash. For example, if you have £6,000 saved up, you could put £4,000 down as a deposit and finance a car worth £10,000 with reasonable monthly payments. The remaining £2,000 could be put towards insurance, tax and other car costs, or spent elsewhere.

Similarly, you might only be able to afford a £2,000 car in cash which will probably be old and more likely to break down. Instead of paying a couple of hundred pounds a month in repairs (on average), that money could be spent on fixed monthly payments for a newer car that is less likely to need expensive repairs.

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Alternatively, if you're interested in buying a new car, many manufacturers will offer sizeable deposit contributions on certain new models. Essentially, they're giving you a discount for taking out a finance agreement with them.

Not being the owner of the car can be seen as a disadvantage; however, it means that you don't have the hassle of trying to sell it on or suffer from the inevitable depreciation. At the end of the agreement (if it's a PCP or Lease deal), you can just hand the keys back and walk away.

As with any financial contract, keeping up with the regular monthly payments will only serve to enhance your credit score. The better your credit rating, the lower interest rates you'll be offered on future finance agreements.

DISADVANTAGES OF FINANCING A CAR

The biggest negative of any car finance agreement is that you have to pay interest. It is possible to find 0% interest deals, but these are reserved for new cars and are often restricted to specific models and time periods. Therefore, majority of car buyers taking out a finance contract will end up paying more than the car is actually worth.

In addition, certain finance products (PCP and Leasing) will add mileage restrictions. If you exceed the contracted annual mileage, you will have to pay mileage fees which are typically around 10p per mile. Similarly, the dealer will charge you extra for any damages or excessive wear and tear that will result in them having to undertake unnecessary work before the car can go back on sale.

At the end of an agreement you can choose to purchase the car and become the owner, or use any positive equity to put towards a new car and another finance contract*. Without saving any additional money and simply entering into a new agreement, you can get trapped in a cycle where car payments seem never ending. In this scenario, you won't even be able to make any modifications because you won't be the legal owner of the car until the full amount has been paid.

Entering into a car finance agreement is a big commitment. Usually, a contract will last anything between 24 and 60 months; if you encounter financial problems during this time, they can be difficult to get out of. You might be stuck paying for a car you can't afford or be charged with early exit fees.

Getting in a position where you can't afford to make your monthly payments would be disastrous. Failing to make a payment will negatively impact your credit score and could lead to the car being repossessed, leaving you in debt and without a car.

Is It Better To Finance A Car Or Pay For It In Cash?

In the eyes of many people "cash is King" and if you can afford to pay for something outright that's the option you should always take. It forces you to live within your means and gives you an asset (albeit depreciating) that you can sell in times of trouble.

However, if you're not in the fortunate position of having thousands of pounds of cash readily available, car finance agreements represent a viable alternative. It's down to the car buyer to find a vehicle and enter into a contract that is within their budget - failing to make car payments can have serious financial ramifications.

*For PCP only

April 25, 2019 at 9:09 AM


Tags: car finance pcp hp leasing personal loan
Category: Buying Advice

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