Why finance is better than cash for buying a new car

Cash has historically been king when it comes to getting the 
best deal on a new car, but our research reveals you 
could be up to £12,000 better off by entering a finance deal...

Finance is cheaper than cash

Walk into a showroom with a suitcase full of cash 10 years ago and you would have had sales staff fighting each other off to help you spend it on a shiny new car. However, that’s no longer the case; even if you do have the money to buy a new car outright, in many cases you’re now better off entering a finance agreement instead. 

One reason for this is that dealers no longer make big margins on sales; the actual profit for each new car they shift can be as little as £200. That means they need to make their money elsewhere, and finance is one area in which they can claw back some dividends. 

Many offer at least £1000 off in the form of a manufacturer’s deposit contribution; the average is currently £1427. And the interest rates on the personal contract purchase (PCP) schemes dealers want to push the most can be as low as 2% or 3%. That’s half the rate you get with many hire purchase (HP) agreements.

In fact, our research shows that in May this year, just over 12% of all new cars were available on a 0% interest PCP deal, with Ford, Suzuki, Toyota and Volvo offering this on up to half of their respective model ranges. 

These incentives can add up to thousands of pounds’ worth of savings for motorists; get a new Nissan Qashqai on a PCP deal and you’ll be more than £3000 better off than a cash buyer, while if you can afford a BMW 7 Series luxury saloon, the difference can rise to as much as £12,000. 

If you opt for an HP finance agreement, you’re allowed to make extra contributions to repay the loan early. With a PCP deal, you’re also allowed to settle the loan early, although the terms and conditions for doing so vary from one finance provider to another, making it important that you read the small print before signing up to ensure any early settlement fees won’t eradicate the savings you should have made from choosing a finance deal over buying the car outright. 

As well as benefiting from the incentives that manufacturers and dealers frequently offer with finance deals, there are other compelling reasons to go with finance – or pay at least £100 of the cash price on a credit card. 

You see, credit card use gives you protection under Section 75 of the Consumer Credit Act 1974. If there’s a problem, this law will cover the cost up to £30,000. Choosing an HP or PCP deal gives you added protection if the car develops a fault, too, because the finance provider and car manufacturer are jointly liable to fix it and refund your payments where appropriate. 

If you get a car through an HP or PCP deal, you’re also entitled to seek compensation from the Financial Ombudsman Service if it develops a problem. If you buy with cash or take out a personal loan to fund the car, you don’t have this right. Whichever way you obtain a car, however, you can still lodge a complaint about it with The Motor Ombudsman if necessary.  

The best buys on finance

We’ve looked at all of the incentives currently being offered by manufacturers on new cars in order to round up the models for which taking out finance is the best option. Only cars that have scored at least three stars in our rigorous road tests are included. All savings are based on a three-year PCP deal with a 15% deposit and a limit of 10,000 miles per year.

City cars

The Kia Picanto has been our favourite city car for the past two years, and if you get a 1.0-litre petrol model in 2 trim on a PCP finance deal, you’ll pay £1000 less than if you buy it with cash. That’s a saving of nearly 16% from the list price. 

6: Kia Picanto 1.0 T-GDi
  • Kia Picanto 1.0 2
  • List price  £11,250
  • Cash Target Price  £10,729
  • Finance Target Price  £9729
  • Finance saving  £1000
New car deal of the day: Hyundai i10
  • Hyundai i10 1.0 S
  • List price  £9900
  • Cash Target Price  £9200
  • Finance Target Price  £8700
  • Finance saving  £500
Peugeot 108
  • Peugeot 108 1.0 72 Allure 5dr auto
  • List price  £14,740
  • Cash Target Price  £13,740
  • Finance Target Price  £13,240
  • Finance saving  £500

Small cars

Based on list prices, the Mazda 2 looks expensive next to rivals such as the Hyundai i20 and Skoda Fabia. However, the gap shrinks significantly when you go down the PCP finance route, thanks to a saving of more than £2000.  

Mazda 2 1.5 75 SE+
  • Mazda 2 1.5 75 SE+
  • List price  £13,795
  • Cash Target Price  £13,422
  • Finance Target Price  £11,240
  • Finance saving  £2182
2019 Renault Clio driving
  • Renault Clio 0.9 TCe 75 Play
  • List price  £13,620
  • Cash Target Price  £12,983
  • Finance Target Price  £10,854
  • Finance saving  £2129
Skoda Fabia 1.0 TSI 95 SE
  • Skoda Fabia 1.0 MPI 75 S
  • List price  £13,140
  • Cash Target Price  £12,402
  • Finance Target Price  £10,502
  • Finance saving  £1900

Next: Best savings on family, executive and luxury cars >

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