Car finance or cash: which option is best for you?

Choosing and financing your next car can be an arduous task. What type to get? Is it time to go electric or hybrid? Will the badge or its sleek looks make the neighbours jealous? Shall I use car finance or cash to get my hands on it?

What we’re getting at here is that there are a lot of variables to consider. Choosing whether to use finance or cash to get your next car can result in big differences in the amount you’ll ultimately pay. Pick the right option and you could potentially save thousands, making it important to understand what’s available and how to calculate what it’ll cost you in the long run.

There are three main choices of car finance available, with the most popular being Personal Contract Purchase (PCP). It allows you to drive a new car and decide at the end of the agreement if you want to buy outright. There’s also Hire Purchase (HP), which locks you into taking ownership of the car at the end of the deal.

Lastly, there’s Personal Contract Hire (PCH), or leasing, which is essentially a form of long-term rental. Choose this option and you can’t keep the car when the contract’s term ends.

Using cash to buy a car

Paying for a car with cash is pretty easy to explain. Unlike with a PCP or HP agreement, you own the car from day one, with nothing left to pay. This also means you can do with it as you please, with no restrictions on how far you drive or modifications, and selling it will be straightforward should the need arise.

That said, new car deals tend to favour signing you up for a car finance scheme. However, there are still plenty of cash deals to take advantage of, especially on nearly new cars – and pre-registered cars with less than 100 miles on them are often offered for thousands less an all-new example. 

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Buying a used car with cash can be savvy too. This is because used car finance generally isn’t as competitive as new car finance. For example, 0% APR deals are regularly offered with new car finance, whereas used car finance schemes generally start at around 6% – and can rise above 12%.

The running costs for a used car might prove higher than a new one, though, but its depreciation might be less. In short, you need to check all the figures and do your sums carefully to avoid any pitfalls.

You also need to bear in mind that over 90% of new car purchases are made via finance. Manufacturers are well aware of this and often offer the biggest deposit contribution discounts in conjunction with finance deals. These are essentially up-front discounts, and can add up to savings of more than £10,000 on premium models that aren’t selling well.

Consequently, to be sure you aren’t losing out on money when looking at cash versus finance, compare the total amount payable by the customer for the finance scheme with the total cash price of the car.

Cash pros

• No contracts, no interest rates
• No restrictions on how you use or modify the car
• You can easily sell the car, whenever you want

Cash cons

• Can be more expensive because of lack of discounts
• Few have enough to buy a new car outright
• You can’t just hand the car back later

Using finance to buy a car

The biggest benefit to financing is that it enables you to afford an objectively better car than you would with just cash. A lot of people are happy to pay that bit extra for a new or nearly new car because they come with warranties, service packs and no MOT test requirements, depending on the age.

Car finance, however, is a broad term. One of the easiest ways of differentiating the different schemes is by whether it allows you to buy the car outright. PCH leasing schemes don’t give you the option, as a case in point – you have to hand the car back at the end of the contract.

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HP splits the cost of a car into a deposit and fixed monthly payments. Once the contract has finished you own the car, making it a good option if you’re confident that you want to keep the car.

PCP lets you choose whether to buy the car or not at the end of the contract. If you want to buy it at the end, you just have to make the final (balloon) payment, which can be expensive. If you don’t want it, hand it back with nothing left to pay. Assuming of course, you’ve stuck to the contracted mileage agreement and the car is in good condition.

Expect the monthly payments to be higher for HP agreements. This is because you’re splitting the total cost into one big payment and a set of monthly instalments. With PCP, you’re paying an up-front payment, fixed monthly payments, and a large balloon payment at the end if you want to retain the car.

Generally, HP is better if you know you want to own the car. If you’re undecided about ultimately owning the car, PCP is the way to go thanks to its lower monthly costs and purchasing flexibility.

If you’re struggling to choose, look at how different the total costs are. For a potential PCP deal, add the deposit, total costs of monthly payments, and the optional final payment together to get the total cost. With the HP deal, just add the deposit and the monthlies together to find out how much the car will ultimately set you back.

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The war in Ukraine, supply chain issues and chip shortages are still causing issues for the automotive sector, however, and have made a big difference to car finance. Before these issues, APR for manufacturer-backed finance typically hovered around 2-5%, whereas now it’s more like 6-9%. This makes a huge difference in your total spend if you’re financing for 48 months.

Car finance pros

• Breaks cost of car into monthly repayments
• Brings newer and better cars into your price range
• Can improve your credit score

Car finance cons

• Deposit required
• Car (usually) owned by finance company until you make final payment
• Mileage and modification limitations

Financing a car vs paying cash: which is best for you?

For some, the cheapest option will be the best option. Others may appreciate the added flexibility that comes with not buying in cash. Car finance lets you split the cost of a car into monthly chunks, whereas cash doesn’t. Cash is generally cheaper than finance on used cars, because used car finance isn’t great, but new cars come with offers such as no deposit and 0% APR.

Finance does allow a greater degree of flexibility, as with PCP you can choose whether to hand the car back or buy it. But at the same time, you do need to enter into a financial agreement. This can affect your credit rating (and your ability to be accepted for further credit) if you don’t keep up payments.

In the end, working out the total final cost of owning the car is the best way to establish which is the best option for you. Financing a new car will most likely work out more expensive in a lot of cases but, to some, the experience and the peace of mind it offers will justify the premium.