Should I buy my car with cash or car finance?

Using cash to buy a car outright

If you’ve got the cash to buy a new car, there are lots of reasons to do so. You won’t pay any interest for a start, and you’ll immediately own the car. 

This isn’t to say there are no other fees to think about though (if only!), you will possibly need to pay a dealership fee, sales tax and VAT along with the standard car expenses like insurance, road tax, and parking costs to consider.

But paying in cash does mean there’s no faffing around with any other companies, you don’t need to increase your life admin load, and once it’s bought the only thing you really need to worry about is which drive-thru you’re going to first.

You can also choose how you pay - with physical bank notes in some cases, or with a credit or debit card, which offers you more protection. 

Regardless of how you pay, your purchase will be protected by the Consumer Rights Act (2015) however it’s worth noting that if you use a credit card - you’ll also get extra protection on top of this. Section 75 of the Consumer Credit Act 1974 means your credit card provider is jointly responsible for remedying any issues with the vehicle or breach of contract with the car seller. This allows you to claim directly with your credit card provider if something goes wrong if your purchase falls between £100 and £30,000.

As with everything in life, there are pros and cons to paying in cash, and they’re worth looking at if you’re considering this as an option:

Advantages of buying a car with cash

• No interest to pay
• No repayments or contracts to sign
• The car is yours from the moment you buy it
• No restrictions on how you use the car or what you do with it

Disadvantages of buying a car with cash

• You will need to pay the full amount upfront, which can take a while to save up
• The car is yours now, you might not be able to hand it back to the dealer if you change your mind
• You may miss out on discounts offered to those paying on finance
• You won’t have the option of switching the car in a few years (as you do with some car finance agreements)

Using car finance to buy a car

Buying a car through a finance agreement is pretty standard these days. It’s become an increasingly popular way to fund a car purchase and there are several ways to do it. 

You’ll start by putting down an optional deposit, and then you’ll be required to repay the amount borrowed (with a bit of interest on top) in monthly installments. At the end of the contract, you may be able to hand the car back, keep it, or swap it for a different model, depending on the contract you’ve got.

Two of the most popular types of car finance are Personal Contract Purchase (PCP) and Hire Purchase (HP). They work in a similar way, but with PCP monthly payments are usually lower, and at the end of the contract you have the choice of making a balloon payment (a lump sum one-off payment) to keep the car, returning it, or starting a new contract. If you choose HP the monthly repayments tend to be higher and at the end of the contract the car becomes yours after a peppercorn option-to-purchase fee is paid.

Car finance can be a flexible way to get your hands on a car, especially if you don’t have a lump sum saved up in cash, however it’s worth noting that due to the interest paid on top of any amount borrowed it can work out as a more expensive option.

If you can’t decide between using cash or car finance, take a glance at the pros and cons here first.

Advantages of using car finance

• Flexible options to suit your lifestyle and budget
• Easy way to get a car without a huge deposit (or any deposit with some agreements)
• Some agreements allow you can hand the car back, keep it, or swap it when the contract is over
• Cheaper options if you’d prefer lower monthly repayments - such as Personal Contract Purchase (PCP)
• You can often own a more expensive car than you could afford to buy outright

Disadvantages of using car finance

• You’ll pay interest on top of repayments - making the overall deal more expensive than buying a car outright
• If you don’t keep up with repayments - your credit score could take a hit and in the worst case scenario your car can be seized
• There might be fees to pay if your repay the car finance company early
• You may still need the money available for a deposit depending on the lender

Is it better to buy a car outright or finance?

Deciding whether to pay in cash or to opt for car finance can be a tricky decision to make. There are pros and cons to each so it requires careful thought. So before you make a decision, put the kettle on, sit down, and take five minutes to think about which option suits your specific circumstances.

Paying in cash is a better option if….

• You have the lump sum of cash ready (as well as enough to cover your other driving expenses)
• You want to own your car outright
• You have some modifications planned already for it
• You don’t want the extra admin of repaying a finance company and another contract to sign

Paying with car finance is a better option if…

• You don’t have the cash to pay for a car upfront
• You have the cash but want to use that on something else
• You’re happy making monthly repayments and fully understand how much the car will cost

What other options are available?

Of course cash and finance aren’t the only options when it comes to buying a new car. There are more, just to add to the decision making. You could also choose one of the following:

• Taking out a personal loan: if you’re eligible for a personal loan, you could use this to pay for a new car. You’ll still have the repayments to make to the bank - plus interest - but the car does become yours straight away.
• Leasing a car: while you will never actually own the car, leasing may be a better option for you if you don’t want the hassle of owning a car, and you’re happy handing it back at the end of the contract.