Is cash better than car finance?
Even if you’re lucky enough to have the cash to splash out on a new motor, you might be better off buying on finance. We consider the pros and cons...
When interest rates for savings are very low, it can be tempting to think that you’re better off buying a new car with cash rather than using manufacturer or dealer finance.
There are benefits and drawbacks of buying a car with cash and finance, and one option will suit some people better than others. Here, we look at the advantages of buying a car outright with cash and the reasons why you could be better off taking out a finance deal instead.
Buying with cash
Although some new car finance deals have a 0% rate of interest, many have some interest applied, and that means the overall price you pay will be higher than the list price or any discounted figure you agree with sales staff.
Buying with cash also means you only need to discuss the car and the discount with the dealer – you don’t have to go through any finance details, such as how much you’ll pay as a deposit or what the monthly payments will be.
The biggest advantage of buying with cash, though, is that you own the car from the moment you take delivery of it. With finance, it’s not yours until the end of the finance agreement, and if you’ve taken out a personal contract purchase (PCP) deal that won’t be until you’ve paid the large final 'balloon payment'.
With a finance deal, you might also have to pay for any excessive wear and tear damage on the car at the end of the contract. If you take out a PCP or personal contract hire (PCH) deal, you’ll also have an agreed annual mileage limit and if you exceed that you’ll have to pay an additional fee per mile.
Taking out car finance
Research carried out by What Car? found that 14% of new cars were cheaper when bought with PCP deals (see our report here), so it’s worth checking all the figures before you buy.
That's because car makers and dealers are keen for buyers to take out finance as it ties them in with the brand and makes them more likely to become repeat customers when the original contract ends.
As a result, car makers offer financial incentives, such as large manufacturer deposit contributions and artificially low interest rates, both of which can make buying through a PCP deal cheaper than cash.
However, PCP and other car finance deals have advantages too. With a PCH deal you’re simply leasing the car, with no option to buy it at any point, and that means the monthly payments will be lower.
Similarly, with a PCP deal you’re only financing the car’s depreciation, rather than the full price, and this also makes monthly payments lower than those on a personal loan or traditional hire purchase (HP) deal. In both cases, the lower monthly costs mean you should be able to get a more expensive car than you would if you were buying with cash or a personal loan.
PCP also gives you the flexibility to buy the car at the end of the contract, so if your circumstances change during the finance period and you have more money, you can change your mind and buy the car. It also allows you to give the car back with nothing else to pay once you’ve paid off half the payments, which is useful if your finances take a tumble.
If you find a model that’s cheaper on a PCP deal than cash because of the manufacturer incentives, you can take up the finance then pay it off early if you have cash in the bank, so you reap the savings of buying on finance and have the benefits of buying outright. If you are considering doing that, check the small print of the deal to make sure you won’t be hit by any early repayment penalties which could wipe out the savings.
If you are considering buying a car on finance, be sure to visit our free New Car Buying service, where What Car? approved dealers can provide you with personalised finance offers.