Should I apply for car finance or buy outright?

The differences between car finance and buying outright

There are two main options when it comes to getting your own set of wheels: buying it outright or taking out car finance. Which one is better depends largely on your personal situation, but it’s important to understand the key differences to make an informed decision.

• when you buy a car outright, it becomes your property then and there. This may sound obvious, but it isn’t the case with car finance. With hire purchase (HP), personal contract purchase (PCP) and car leasing, you don’t own the car when you enter into the agreement
  
  
• with some types of car finance, you can simply hand back the car and upgrade to a new one when the agreement term is over. If you buy a car outright, then it’s your responsibility to sell it if you don’t want it anymore
  
  
• buying a car upfront involves making a one-off payment, but with car finance you’ll likely have to pay a deposit followed by monthly repayments. In the case of HP, your monthly payments contribute to your eventual purchase of the car. With car leasing, though, the monthly payments simply allow you to use the car but don’t contribute to the purchase of it
  
  
• buying outright is cheaper than finance. This is because interest and fees are added to finance options, making the overall cost of the car higher
  
  
• using a finance option to buy a car can help your credit score – if you are a responsible borrower. By always making your monthly repayments on time and in full, you can prove your ability to repay credit

Car finance vs buying outright: the pros

While the ‘right’ option depends on your situation, it’s good to be aware of the pros and cons of both. This way you can feel confident that you’re making the decision that’s most suitable for you.

Here’s a quick breakdown of some of the benefits of car finance vs buying outright.

Car Finance	Buying outright
Your choice of car isn’t limited by the amount of cash you have access to upfront	You own the car as soon as you drive it out of the dealership
You can spread the cost over time	You pay a bigger sum to begin with, but it works out cheaper in the long term
The interest and the monthly payment amount are fixed for the duration of the agreement – making budgeting easier	You don’t have to worry about additional fees or charges if you use savings
It can help improve your credit score, as long as you make the monthly repayments on time and in full	You don’t have to factor recurring payments into your budget
Not having to use all of your cash to buy the car allows you to keep your ‘nest egg’	No mileage, usage or modification restrictions
With some finance options (like PCP), you don’t have the hassle of selling the car on at the end of the agreement if you no longer want it	You can part-exchange or sell the car whenever you want, and you’ll keep the full amount

Car finance vs buying outright: the cons

There are two sides to every coin, and so it is with the options for buying a car. Here’s a list of some of the cons. 

Car Finance	Buying outright
Interest and fees mean you end up paying more for the car in the long run	This can leave you without savings, which you may need in an emergency
There may be additional fees if the car is damaged, or if you want to buy it at the end of the agreement	The value of cars depreciates, so your car will be worth less than you paid for it very quickly
You don’t necessarily own the car at the end of your finance term, depending on the type of finance you’ve chosen	Your choice of cars can be limited by the amount of cash you have available upfront
It can be difficult to get out of finance agreements	Limits how often you can upgrade your car
There may be mileage, usage and modification restrictions	You have the responsibility of selling or getting rid of it if you don’t want it anymore
If you fail to make your repayments, your credit score can be negatively affected	Uses up savings that could be used on other investment or savings products

Are there any alternatives?

While car finance or buying outright are some of the most popular options for getting a car, they aren’t the only ones available.

Taking out a personal loan can be a good method of buying a car. It’s a bit like having the best of both car finance and buying outright, as you get the benefit of owning the vehicle immediately while being able to spread the cost.

However, unlike with most car finance options, the interest rates for personal loans may not be fixed for the whole repayment period. Your monthly repayments may also be higher with personal loans and you may need a good credit score to be approved.

You can also buy a car with a credit card. This option allows you to shop around for the best interest rate, as well as offering further flexibility on the repayment period. Purchases made with credit cards also benefit from extra protection.

However, some car dealerships may charge a fee for using a credit card, and some may not accept them at all. It’s also essential that you ensure you can make the monthly repayments, otherwise your credit score will be negatively affected.

Another option is remortgaging your home as a means of borrowing the money to buy a car. Similar to taking out a personal loan, it means that you’ll own the car straight away. You also won’t be at risk of any additional fees as you can be with some types of car finance. However, remortgaging can take time (as you’ll want to find the best deal) and you may face charges for making changes to your mortgage.

Things to consider before deciding

There isn’t necessarily a ‘good’ or ‘bad’ option when it comes to buying a car, there’s only what’s right for you. That’s why it’s really important to carefully consider the following before deciding how you’re going to buy your car:

• will your credit score allow you to get car finance? Some finance options (like HP) are more likely to approve you if you have a low credit score than others (like personal loans). Your credit score will also impact your interest rate, making some of the options that usually have lower monthly repayments, such as PCP, more expensive. If you’d like to learn more about credit scores, visit our guide to credit ratings
  
  
• can you commit to the monthly repayments? Missing a payment can negatively impact your credit score, so it’s essential that there’s room in your budget for them
  
  
• do you have a safety net of savings? Having a lump sum to spend on buying a car outright doesn’t necessarily mean you should use it all for that purpose. It’s wise to have some money put away for emergencies if you can
  
  
• do you need to own the car? If you’re just looking to have exclusive use of a car with lower monthly repayments, leasing a car or getting a PCP may be suitable for you. If you want to take ownership of the car eventually and you want to spread the cost of it, an HP agreement might be a suitable option. You won’t have to pay upfront, but you’ll be working towards owning it

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*Representative example: Borrowing £6,500 over 5 years with a representative APR of 19.9%, an annual interest rate of 19.9% (Fixed) and a deposit of £0.00, the amount payable would be £166.07 per month, with a total cost of credit of £3,464.37 and a total amount payable of £9,964.37. Rates may differ as they are dependent on individual circumstances. Subject to status. We're a credit broker, not a lender.

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