Car finance or cash: which is best?

  • The best finance deals allow you to pay less money than cash
  • Finance generally more flexible
  • Cash is ultimately easier

Choosing your next car can be an arduous task. What type to get? Is it time to go electric? Will the badge make the neighbours jealous? Shall I get car finance, or buy in cash?

What we're getting at here is that there are a lot of variables to consider. And while some enthusiasts are all about the 0-62mph times and limited slip differentials, the cost of a car is more important to most people.

Choosing whether to finance or not directly affects how much a car costs. Picking the right option can save thousands over the course of an agreement.

There are three main choices of car finance available. Personal Contract Purchase (PCP) is the most popular. It allows you to drive a new car and decide at the end of the agreement if you want to buy outright. Hire Purchase (HP) locks you into buying a car.

While Personal Contract Hire (PCH) or leasing works like a form of long-term rental. You won't have the option of buying at the end.

Car loan or car finance


This might be a moot point for some. But we guess if you're googling this, you probably have access to savings 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.

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. Pre-registered cars with less than 100 miles on them are often offered with thousands of pounds off. 

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 9%. But remember, generally older cars have higher running costs.

Around 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 more than £10,000 on premium models that aren't selling well.

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.

Car finance or cash?

Cash pros

> No contracts, no interest rates
> No restrictions on how you drive
> You own it outright immediately. No need to ask permission to modify

Cash cons

> Requires saving up
> Can be more expensive because of lack of discounts
> Unattainable to buy a new car for most people

Further reading:

>> Pivotal - Jaguar and Land Rover's subscription service explained
>> No deposit car finance offers
>> The best hybrid cars to lease
>> The best electric cars to lease
>> Lease or buy: rent or keep?
>> How to find cheap car finance
>> Car payment holiday advice
>> Personal loan or car finance?

Car finance

Car finance 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 - you have to hand the car back at the end of the contract.

>> Search for car leasing deals

Citroen virtual showroom

HP splits the cost of a car into a deposit, and fixed monthly payments. Once the contract has finished you own the car.

PCP lets you choose whether to buy the car or not at the end of the contract. If you want to buy at the end, make the final (balloon) payment. If not, 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 monthly payments to be higher for HP agreements. This is because you're splitting the cost into one big payment and a set of monthly instalments. Whereas with PCP, you're paying an up-front payment, fixed monthly payments, then you have the option of buying the car outright with a balloon figure.

Generally HP is better if you know you want to own the car. Whereas if you're undecided about owning, PCP is the way to go.

If you're struggling to choose, you can see how different the total costs are. It's simple to figure out. For the PCP add the deposit, total costs of monthly payments, and the optional final payment together. With the HP add the deposit and the monthlies.

Car finance or cash?

Choosing cash means you skip out on any interest payments. Even on new cars, some manufacturers offer upwards of 9.9% APR on PCP plans - even if you have good credit.

>> Bad credit car finance explained

Car finance pros

> Can improve your credit score
> Breaks cost of car into monthly repayments
> 0% APR regularly offered

Car finance cons

> Deposit required
> Car (usually) owned by finance company until you make final payment
> Mileage/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 with new cars, finance deals can often be cheaper than the cash price.

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.

Ultimately, working out the total final cost of owning the car is the best way to measure whether which choice is right for you.

What to read next - car finance 

>> Best cars for £90 per month
>> Best cars for £100 per month
>> Best cars for £150 per month
>> Best cars for £200 per month
>> Best cars for £400 per month
>> Best cars for £500 per month
>> Deal Watch: top cash, finance and leasing offers

External links

>> Money advice service