Which is best - cash or finance?

musicgirlrachel

Sorry if this has been asked before, I did have a quick look but couldn't see much.

I'm looking at changing my car (and doing the whole thing without help from parents etc for the first time) I've saved up enough to buy a second-hand car outright (including part-exchanging my current car). However, every dealer/car supermarket I've spoken to are trying to talk me into PCP schemes, primarily (so they say) so I could change my car more frequently.

I've read all the guides about the different options so I know how PCP, Leasing, HP etc all work. But my question is, if I can afford to buy the car outright is that the best (and cheapest) way of doing it?

Thanks in advance!

neilmcl

musicgirlrachel wrote: »

Sorry if this has been asked before, I did have a quick look but couldn't see much.

I'm looking at changing my car (and doing the whole thing without help from parents etc for the first time) I've saved up enough to buy a second-hand car outright (including part-exchanging my current car). However, every dealer/car supermarket I've spoken to are trying to talk me into PCP schemes, primarily (so they say) so I could change my car more frequently.

I've read all the guides about the different options so I know how PCP, Leasing, HP etc all work. But my question is, if I can afford to buy the car outright is that the best (and cheapest) way of doing it?

Thanks in advance!

Yes, pretty much every time, particularly with a used car.

kmb500

If you are talking about financing a used car vs buying it, then yes it will be cheaper to buy it outright as you will likely be charged interest on the finance, and the finance is for exactly the same as the cash price.

If you are talking about buying a used car vs. financing a new car then it is a completely separate ball game and not really comparable.

DrEskimo

Sometimes it can be worth using the dealers finance to take advantage of deposit contributions and free servicing.

There was a thread over on the loans section about whether you settle or withdraw the finance, but essentially you just end up paying a small amount of interest, but keep the 'perks'.

The other thing to bear in mind is the price of discounted new models. For example I have ordered a new car, but only because I cannot find a used one for cheaper...! I am keeping an eye out until the new car is delivered, and will happily cancel my order a buy a cheaper used one if it comes up. This only really applies to latest models, so nearly new.

System

The best way is the cheapest way. If you have the cash to buy outright this means one of three options:

1) PCP. You do this if the price is cheaper or the deal is better and includes extras on PCP which is sometimes the case as dealers get commission. You then repay the PCP in full within 14 days of taking it out, the cooling off period, so you get the deal but don't pay any interest.

2) You take out finance. You do this if the interest rate on the finance is LESS than the interest rate on the money you've got tucked away. An example of this would be a 0% deal. In this case say for a £10,000 car over 5 years the maths is as follows:

£10,000 loan, 0% interest, amount repaid £10,000

£10,000 sat in the bank, 5% interest, value after 5 years £12762.

So with your savings earning 5% and the loan being 0% you would be £2762 better off as the money you would have used to buy outright is still going to be sat there earning more interest than the loan is charging.

3) You pay cash. You do this if the interest rate on the loan is higher than the interest you get on your savings. An example would be if you have savings sat in an account earning 1% interest and the loan interest rate is 7%.

£10,000 loan over 5 years at 7% APR, total repayable £11819

£10,000 in account earning 1%, value after 5 years, £10,510

Paying in cash would leave you £1,309 better off.


It is simply a case of sitting down with a bit of paper and a calculator, doing the maths and deciding which gives you the best outcome financially.

System

kmb500 wrote: »

If you are talking about financing a used car vs buying it, then yes it will be cheaper to buy it outright as you will likely be charged interest on the finance, and the finance is for exactly the same as the cash price.

Sorry but this is completely wrong, see above post.

loskie

you don't say what your needs are in a car.
I have had bought brand new, leased and bought cars 5 to 7 yr old used privately for circa £5k. I do 20000m per year and prefer the latter to be honest. In fact my previous car cost me £1400 and was run for 3 years then sold for £400, current car was £4.5k Honda CRV so far so good. Bought from the 1 and only private owner.
Do you want to lose money on an expensive depreciating asset? PCP is a good way for the car salesman to lock you into a lifetime of finance.

parking_question_chap

Buy with cash, will be the cheapest.

MountainMan101

You real options are cash vs finance for a few weeks and then pay off with cash.

Apart from the 0% deals (which are available) all the other PCP have higher APR than banks pay on cash.

Don't rule out finance - on a low value car the commission on the finance pays more than the commission on the sale. Hence the dealer contribution.

If you don't want to be sneaky, for example if you think you want to use them for servicing, or just don't feel like doing it. Ask for the best deal for a PCP, push for the lowest vs a bank loan (3.3% with HSBC). Put down a deposit - car is now sold effectively, wait a day and phone to arrange a collection and tell them you'll pay cash.

Just do all the haggling for accessories, petrol, etc beforehand. And try and get it in an email.

Bigphil1474

Don't forget peace of mind - you buy a 2nd hand car outright with cash, it blows up a few weeks later - no car, no cash. Having said that, I have always bought cars with cash, but my brother sources my cars (he's a mechanic and been good so far). Whilst finance doesn't mean your car won't go boom, at least you'll have the cash as back up. Really depends how much you need the car, and whether you have access to a decent garage.

DrEskimo

Bigphil1474 wrote: »

Don't forget peace of mind - you buy a 2nd hand car outright with cash, it blows up a few weeks later - no car, no cash. Having said that, I have always bought cars with cash, but my brother sources my cars (he's a mechanic and been good so far). Whilst finance doesn't mean your car won't go boom, at least you'll have the cash as back up. Really depends how much you need the car, and whether you have access to a decent garage.

Whilst I would always advocate having a emergency fund or additional money for repairs, why not borrow money to pay the repair instead? It will be much cheaper than a secured loan on the car... Could even use a 0% credit card.

A loan is a loan. Whether it's secured on the car as a HP or PCP, or unsecured personal loan or credit card. The point is using whatever form of finance is cheapest. It will NEVER be a secured PCP loan. It is the most expensive way to borrow money.