Is it Better to Buy a Car with Cash or Finance?

The process of getting a new car can be daunting and time consuming, with so many options for buying or financing a car on the market it can be hard to know where to start.


In the following guide we’ll discuss the difference between buying a car on cash or finance, to get you up to speed on all the ins and outs of what to look for in vehicle loans and deals. That way when it comes to purchasing your new car you’ll know exactly which deal is the right one for you. 


Car Financing


Car financing is a cost effective, long term plan for getting a new car. Through financing, an agreement will be made between you, the customer, and the lender. This agreement is paid off through monthly instalments. Thanks to the monthly payment system, you aren’t required to have the funds for your new car up front making it a viable option to a wide variety of budgets. 


Whether you want a new or used car, if you have a good or bad credit score, there could be a financing option available to you. 


Different Types of Finance


When considering car financing, it’s important to familiarise yourself with all the different varieties and how they could be beneficial to you and your budget. 


Personal Contract Purchase (PCP)


With PCP financing, you would start by making a deposit (typically 10% though this may differ depending on the lender and the market) and then have fixed monthly payments to cover the depreciation of the car. 


It should be noted that during the contract, the car belongs to the company. 


Once the contract ends, you will have three options: 

  • Make a balloon payment, this means you pay off the rest of the money and keep the car.
  • Exchange the car.
  • Return the car to the company.
 


Thanks to the multiple pathways given at the end of the contract, PCP is a great option for people who like to change or update their cars often. Please note that with PCP, there are mileage restrictions and certain fees you may have to pay when handing back the car. 


Personal Loans


Personal loans is one of the most popular finance options due to it’s budget adaptability. This involves borrowing the money, typically from a bank or building society, with which you can buy the car. 


Once you have bought the car, the money you borrowed is to be paid back to the lender, with interest which will be decided by the lender individually based off of the duration of the loan and your personal circumstances, over a time period that suits you best. 


Personal loans are paid directly to you and the agreement is not secured on the asset. If you’re interested in a loan, check out our car loan calculator


Hire Purchase (HP)


Hire purchase financing functions fairly similarly to PCP. A deposit could be required at the start, the payment will be a fixed monthly rate, and until the final payment the car is owned by the company. 


Once the final payment has been made, the ownership is handed over, though throughout the contract there is the option to cancel or settle early. 


To get started, use our hire purchase finance calculator to see if this is right option for your budget. 


Guarantor Loans


Car finance with a guarantor means that you apply for the car loan with an agreed party listed who will make the payments for you if circumstances render you unable. 


This option is often suited to people on low income, such as students or the self-employed with inconsistent income, and people with bad credit or no credit history


If you think this could be the best option for you, check out our guarantor car finance page for more extensive information. 


Advantages of Car Financing


Spreading the Cost


A notable advantage to all financing options would be spreading out the cost of the car repayment. Paying in bulk doesn’t suit all budgets, but due to the nature of loans the cost is spread across a given timeframe, allowing people with lower or inconsistent income the opportunity to get a new car. 


Budgeting Options


With financing, there are more budgeting options. This makes updating your car much more accessible to people from all walks of life. 


No matter which type of finance you choose, having fixed monthly payments is a great way to work out your budget for each month so that you don’t overspend. 


Improving Credit Score


Financing also opens options of improving your credit score, making regular payments on time will demonstrate your ability to effectively manage your money. Which in turn could see your credit score improve accordingly. 


Disadvantages of Car Financing


Paying Interest


The most obvious of downfall to car financing would be paying interest. This means that even though you get the benefit of spreading the cost out over the course of your contract, you will be paying above retail price. 


The interest rate of your contract will generally depend on the lender and your personal credit history. With this in mind, finding a way to boost your credit score before applying for car finance may result in a lower interest rate for your contract. 


Risk of Losing the Vehicle


Due to financing being a loan-based solution, if you are unable to keep up the monthly payments on your car there is a risk of it being repossessed and other detriments to your credit. 


This alone highlights the importance of doing your research and pursuing a payment option that suits your budget. If you go forward with a deal you can’t comfortably afford then you risk the vehicles repossession. 


A Tighter Budget


Though financing is a better, more cost effective, solution for some, it can also stretch your budget. One unexpected expense could put you in a tricky situation for keeping up with the contracted monthly payments. 


There are of course alternatives to this such as guarantor loans, but it’s important to choose an option that suits your budget and circumstances. 


Insurance


With financing a car typically comes newer car models. While on the surface this is a good thing, when it comes to the insurance of the car it may be a different story. 


A newer car model invites a higher cost for insurance, additionally the lender may expect you to take out some additional liabillity cover to ensure that their assets are protected. 


To dodge these extra costs, a used car could be a more cost effective option instead of getting a new car. 


Buying with Cash


When compared to financing, buying a car with cash is a much more straightforward process, though is the lesser sought out due to the financial implications that come with it. 


Advantages of Paying Cash


Spend Less Money


When buying a car with cash, there is no monthly payment interest to go on top of the price of the car. This ultimately means that you pay less overall for the vehicle, though it does have a draw back in that you are required to pay in one upfront payment. 


This may be a viable option for some, however there is a chance of this option not being suitable for your budget. 


Bargaining Power


When paying with cash, you have the upperhand in the deal. Whether it be that you want to haggle down the price or just simply walk away from the deal, until the money has been exchanged the ball is in your court. 


Disadvantages of Paying Cash


Financial Strain


As with any bulk payment, paying cash for your car is going to take a big chunk out of your savings. With this in mind, it is important to make sure that the car is the make and model you want, there was no way of getting the car for any cheaper, and most importantly, be certain that it is an expense your budget can comfortably afford. 


No Returns


While a good majority of dealers honour returns for buyers, there are still a few that don’t. If this is a deal breaker for you, be sure that the contract clearly states the dealers policies on returns. 


Notable Price Factors


When looking to buy a car, it is worth while to get yourself clued up on what the dealerships may use as factors to mark up or down the price of the car. 


Invoice Price


For starters, it’s important to know that theres the invoice price (what the dealer pays for the car from the manufacturer) and theres the window sticker price (the manufacturer suggested retail price or MSRP). 


Car History


From there, if the car you are looking at is second hand, you might want to start to look into the cars history and how that may have changed the price. Things such as mileage, registration and manufacture year, fuel economy and emission statistics are all factors that may affect the price of the vehicle. 


Market Conditions


Finally it is helpful to be aware of the market conditions when you are looking to purchase the car as this could make the car more or less expensive. 


For instance, part shortages can sway the market and make the prices of used cars shoot up. This was the case during the COVID-19 pandemic as there was a worldwide shortage of semiconductor chips. 


Another market factor that may affect the price of the car you are looking to purchase could be the car itself. If the model you are looking at is in short supply then the price for the few that are left will naturally increase. 


Discover the Benefits of Car Finance with Quick Car Finance


At first glance, car finance can be daunting and knowing where to start can be hard. With so many options available, knowing what you want out of your contract is important. 


If car finance is for you then Quick Car Finance could help! Explore the options available to you through our free car finance calculator and get your no obligation quote today. 

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