Should I get a car on finance?

Have you ever wondered how much the average person spends when they finance a car?

Well I have done some research and the answer is shocking!

Average Borrowing Amounts:

• New Cars: Approximately £25,325.
• Used Cars: Around £15,475.

Purchasing a car is a major financial decision, and one of the key considerations is whether to pay in cash or use finance. Both approaches have their advantages and disadvantages, depending on your financial situation and goals. Here's a detailed comparison to help you decide which option suits you best.

Paying for a car outright with cash means you own the vehicle immediately without any ongoing financial obligations. Here's a look at the pros and cons:

1. No Interest Payments: By paying in cash, you avoid interest charges that come with financing. For example, financing £10,000 over 48 months (4 Years) at a 6.6% APR (Interest Rate) would result in a total repayment of £11,713.96, meaning £1,713.96 in interest.
2. Full Ownership: You own the car outright from day one, which means no worries about missed payments or repossession.
3. No Monthly Commitments: Without monthly finance payments, your cash flow remains more flexible for other expenses or savings.
4. Potential Discounts: Many dealerships offer discounts for cash buyers, as it simplifies the transaction for them.

1. Upfront Cost: Paying a large sum upfront can deplete your savings, leaving you with less financial cushion for emergencies.
2. Missed Investment Opportunities: The cash spent on a car could be invested elsewhere, potentially yielding higher returns than the interest saved by avoiding finance.
3. Limited Options: Your budget might restrict you to less expensive vehicles if you're paying in cash.

Car finance allows you to spread the cost of a vehicle over time, making higher-priced cars more accessible. Here are the pros and cons of this approach:

1. Affordability: Financing spreads the cost of a car into manageable monthly payments. For instance, UK buyers typically spend between £300 and £400 per month on finance payments.
2. Access to Better Cars: With finance, you may afford a newer or higher-specification vehicle than if paying outright.
3. Preserved Savings: Financing allows you to keep your savings intact for emergencies or other investments.
4. Flexible Options: Many finance deals include extras like maintenance packages or the option to upgrade your vehicle at the end of the term.

1. Interest Costs: Interest rates vary based on your credit score, with APRs ranging from 3% for excellent credit to over 20% for poor credit. Over time, this can significantly increase the cost of the car.
2. Ongoing Obligations: Monthly payments reduce your financial flexibility and must be maintained to avoid penalties or repossession.
3. Depreciation: Cars depreciate rapidly, and you may end up owing more than the car's value during the finance term.
4. Potential Fees: Some finance agreements include additional charges, such as early repayment fees or penalties for exceeding mileage limits.

When deciding between cash and finance, take these factors into account:

1. Your Financial Situation: Evaluate your savings, income, and budget. Can you afford to pay in cash without straining your finances?
2. Interest Rates and Loan Terms: Research financing options to understand the total cost of borrowing.
3. Vehicle Depreciation: Consider how quickly the car’s value will decline and whether this affects your decision.
4. Long-Term Goals: Align your choice with your financial goals, whether that's maintaining liquidity or minimizing costs.

Both cash and finance have their merits, and the right choice depends on your personal circumstances. Paying in cash offers simplicity and cost savings, while financing provides flexibility and access to better vehicles. To make the best decision, consider the total costs involved, your financial stability, and your future plans. Consulting with a financial expert or using online calculators can help clarify which option is most suitable for your needs.