Cash purchase vs finance packages
For those lucky enough to have a lump sum, it’s the perennial question that will never go away.
…do I purchase my next car outright, or do I buy it through a car finance scheme?
For sure, both have their merits, and both have disadvantages. But - as ever - deciding your course of action should be based around your personal financial situation…not just in the present, but in the future.
The advantage of buying a car with cash
Clearly, the biggest appeal of buying a car with a one-off cash payment is that you are paying off the vehicle in one go.
Obviously this means that you own the car outright from the moment you drive it away from the dealership.
It’s simple, it’s straightforward and, of course, it is cheaper overall considering that you avoid incurring extra interest charges on your purchase.
The drawback of buying a car with cash
It’s just an unescapable, inconvenient fact that - unless you are buying a rare classic model - every car will depreciate…and probably quicker than you imagine.
Most new cars lose between 50-60% of their value inside three years, whilst those at differing stages of the 'depreciation curve’ aren’t immune either. It’s a simple fact of life that cars lose money!
For that reason, it maybe isn’t all that savvy for someone to tie up all their disposable cash into a depreciating asset…when that money could have been better spent elsewhere. Home improvement perhaps (adding value)?…or an investment that would actually appreciate (go up in value) over time?
And of course, it can be a risky strategy to use all (or at least a large proportion) of your disposable cash on a car if it meant you don’t have a 'nest egg’ to fall back on in an emergency…ie sudden unemployment or a broken boiler!
The advantage of buying a car on finance
Whether you opt for a Personal Contract Purchase (PCP) deal, or a traditional Hire Purchase (HP) deal, the main advantages of purchasing a car through finance are obvious – flexibility and expediency.
First of all, finance packages increase flexibility of choice (by virtue of helping to stretch your budget). And, of course, a finance package helps you enter the market immediately…no long drawn out savings plan!
The other huge bonus is that, by utilising a finance package, you get to keep your savings for other uses, such as investments or emergency cover.
And last, but not least, by making continuous monthly payments on a car finance plan, you will dramatically improve your credit score. This can be particularly useful for younger drivers when they come to make mortgage applications further down the track.
The drawback of buying a car on finance
The obvious negative of buying a car on finance is that you invariably have to pay interest…though it must be said that rates are pretty much lower than they’ve ever been. Even so, it is a consideration and buyers are advised to look at the 'total amount payable’ on a deal to ascertain whether they feel it's a price worth paying.
Also, a finance deal is a commitment. Usually a contract will last anywhere between 24 and 60 months and you will still be required to make payments even if you enter financial difficulties, or early exit penalties can be accrued.
It’s also a consideration for those who like to make modifications to a car, that the terms and conditions of your finance deal may preclude you from doing so.
Conclusion
There really is no wrong or right answer here - it depends on your personal circumstances.
If you are in the more fortunate position of being able to choose, then you simply need to ask yourself whether the funds you already have might be better held back for something else…even though a finance deal might cost you money.
But, buyers need to be aware that whilst “cash is king” when negotiating discounts in many areas of life…that doesn’t apply to car dealerships (who often rely on some finance commission to make profit from a deal).
With those factors in mind, a mixture of a sizeable deposit and some sort of finance package could be the best option.