While it might sound like a question with a clear-cut answer, the conundrum of whether to buy a car with cash or to finance is still pertinent for those who find themselves with the capital to do either. The question that we will answer today though is whether financing or cash deals are cheaper, but before then let's look at the pros and cons of both cash purchases and finance deals.
Financing
Pros
- The ability to purchase a better car sooner, without having to save for years, with the finance application approval being the only hurdle
- The installments are predictable and manageable on a monthly basis
- Your credit score will improve, allowing you to purchase property and upgrade your car in future
- The possibility of taking advantage of special deals from dealerships and manufacturers
Cons
- It will take years before the car is legally yours
- You will pay a large amount of interest throughout the loan period
- It may take years for you to have paid off enough of the vehicle in order to trade it in without a shortfall
- You will be paying off what is an ever depreciating asset
- Failure to make payment means a negative impact on your credit score
- Finance contract are difficult to get out of, meaning that if your situation changes, you will find it difficult to change
Cash
Pros
- You will avoid interest charges
- You will purchase a car within your means as it is impossible to overspend with a finite budget in place
- The car is yours instantly
- There is no chance of defaulting on the loan since there isn't one in place
Cons
- You will not improve your credit score
- You will have depleted a large sum of capital
- You are limited in terms of your vehicle options
Cost comparison
While it may appear that the interest-laden finance deal is the more expensive of the two, if we consider the capital outlay associated with the cash deal, the idea that a large proportion of that money could be used in various investments throughout the two-to-six-year period usually taken out over a loan period must be considered. However, having looked at various savings and investment options, there is certainly no guarantee that these will have large returns and certainly no surety that they will make a finance deal cheaper than a cash-only deal. Therefore, almost all of the time, the cash deal is the cheapest way of buying a car, but is most certainly not the most practical.
