How will you buy your next car? Cash, lease, or financing?

Are you eyeing up a shiny new car or dreaming of upgrading to a more reliable vehicle? 

Before you make your move, it’s crucial to understand your options when it comes to financing. In the UK, there are a lot of consumer credit rules governing the main options for purchasing a car - each with its own set of pros and cons. Let’s break them down.

Cash Purchase

Pros:

• Ultimate Ownership: Buying outright with cash means you own the vehicle outright from day one, giving you complete control
• No Interest: You won’t incur any interest charges or additional fees, saving you money in the long run
• Negotiating Power: Cash buyers often have more leverage to negotiate a lower purchase price
• No monthly payments: Not having to meet monthly finance payments gives you more flexibility to cope with changes in income or other expenses, and you’ll never fall behind with a car finance company or loan provider.

Cons:

• Using up savings: Paying with cash means parting with a significant sum upfront, potentially leaving you with reduced (or no) savings
• Limited Budget: The car you can buy is dependent on the amount of cash you have saved up, limiting your options
• Opportunity Cost: Sinking all your money into a car means you can’t use it for other things like paying off expensive debts, investing in new skills, a holiday, or a home deposit.

Personal Lease

Pros:

• Lower Monthly Payments: Leasing typically involves lower monthly payments compared to financing
• Newer Models: Leases often allow you to drive a newer vehicle with the latest features and technology - this can make it more cost-effective to run and maintain
• Minimal Upfront Costs: Leasing usually requires a lower upfront payment, making it more accessible for some consumers.

Cons:

• No Ownership: You don’t own the vehicle at the end of the lease term, and you could face additional charges for excess mileage or wear and tear dictated by the leasing company
• Long-Term Costs: While monthly payments may be lower, leasing can be more expensive in the long run, compared with buying outright.

Hire Purchase

Pros:

• Spread Payments: With hire purchase, you can spread the cost of the vehicle over a fixed term, making it more manageable for budgeting
• Ownership at the End: Unlike leasing, you own the vehicle once all payments have been made, giving you the security of owning the car yourself at the end.

Cons:

• Higher Total Cost: Hire purchase agreements often come with higher overall costs due to interest charges and fees
• Depreciation Risk: As vehicles typically lose value over time, by choosing an option where you own the car, you need to be aware that the vehicle’s value may decrease throughout the agreement, and continue to decrease once you own it. 

Personal Contract Plan (PCP):

Pros:

• Flexible Options: PCPs offer flexibility at the end of the term, allowing you to choose between returning the vehicle, purchasing it outright, or starting a new agreement
• Lower Monthly Payments: Monthly payments on a PCP are typically lower than those on a hire purchase agreement.

Cons:

• Mileage Restrictions: PCPs often come with mileage restrictions, and exceeding these limits can result in additional charges
• Balloon Payment: At the end of the agreement, you may face a significant balloon payment (a large, one-off payment) if you choose to purchase the vehicle outright.

Our internal research indicates that for a typical new family car, PCP seems to be the most expensive option. While the total cost will obviously vary from different suppliers and depending on borrowers’ circumstances, given that PCP is the most common form of car financing, this suggests that a lot of people might be paying over the odds for their vehicle.

Did you know…

The Financial Conduct Authority recently carried out a review into past selling of vehicle finance by dealers. Some commentators suggest that this might uncover widespread mis-selling by dealers and finance companies, leading to billions of pounds in compensation, as explained in this article from Which?.  

When deciding on the best option, consider your financial situation, lifestyle, and long-term goals. Whether you opt for the security of ownership with a cash purchase, the flexibility of leasing, or the structured payments of financing, understanding the pros and cons will help you make an informed decision that meets your needs.

Interestingly, financing a car purchase is the second most common reason for taking out a salary-linked loan with Salary Finance, so make sure you check what that option would cost you before making a decision.