Financing a car or buying outright – which is better?

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Buying a car with cash

Buying a car with cash is one of the quickest and often cheapest ways to purchase a vehicle. You can immediately narrow down your search options by looking for cars within your set budget. Then once you’ve found and paid for your ideal vehicle, you own it outright.

Advantages;

  • Quick and hassle-free; you pay for the car and own it outright straight away
  • Many dealers offer special cash only prices so you can save a considerable amount
  • No worries about paying interest on a loan or car finance agreement

Disadvantages;

  • It may limit the cars you can buy as you need the money upfront
  • Can leave you with very little savings

Buying a car with a personal loan 

Personal loans are available from banks, building societies and some finance providers and can be used to pay for a car. They usually allow you to spread the cost of buying a car over one to seven years.

Advantages;

  • Allow you to spread the cost of a car into more affordable payments which can help you buy a more expensive car
  • Interest rates are currently low so usually easy to find a good deal
  • You own the vehicle outright as the borrowing is not associated with the vehicle
  • Set monthly payments are fixed for the course of the loan making them easy to budget

Disadvantages;

  • Best rates only usually available to those with good credit scores
  • People with bad credit may struggle to get a loan
  • Can affect other borrowing you may wish to make in the future

Car finance

Car finance is similar to a loan. However, the finance is directly linked to the vehicle, which means you do not own the car until you make the last finance payment.

Two of the most popular car finance options are hire purchase (HP) and personal contract purchase (PCP). Both allow you to spread the cost of a new car over more affordable monthly payments, but have different pros and cons. 

Many car dealers work with a panel of lenders, to be able to offer HP and PCP to a wide variety of customers.

Below we explore the two options in closer detail, to help you work out the best option for you.

Hire Purchase (HP) 

With HP, you are essentially buying the car on finance, with the loan secured against the vehicle. You do not own the vehicle until all the finance payments have been made.

Typically you will need to pay a deposit with the remaining balance split over a set period at an agreed interest rate.

Generally, most HP agreements last between 12 to 60 months.

The interest rate offered will depend on your credit score, with those with a better credit rating usually eligible for the better rates. However, it is very competitive, and as interest rates are currently low, it is generally fairly easy to get a good deal.

Find out more about how Hire Purchasecan help you buy your dream car.

Personal Contract Purchase (PCP)

PCP is similar to HP in that you pay a deposit and then make monthly payments. However, it typically offers customers lower monthly repayments, as you only get a loan for the difference between the price of the car when it is brand new and its predicted value at the end of the hire agreement.

So with PCP finance, you have more flexibility at the end of the agreement.

You can choose to pay off the predicted value of the car, known as the balloon payment. Once you pay this figure, you become the owner of the vehicle.

However, you can also choose to part-exchange the car and use any value towards a deposit on a new PCP deal. Alternatively, you can simply hand the vehicle back to the dealership.

For this reason, PCP is a more flexible type of finance and often suits people who like to change their cars every few years.

Is it better to buy with cash or finance a car?

Ultimately, it is down to you to decide whether it is best to buy a car outright with cash or get car finance. If you have the savings available, buying outright with cash is often the cheapest method. However, you should bear in mind this may limit the vehicles you can afford.

Currently, many dealerships offer attractive rates, including interest-free finance on many brand new models. So not only could buying using finance be cheaper than you thought, but it could enable you to buy a newer model with warranty remaining, to give you peace of mind motoring for years to come.