Buying a car Cash, loan or lease?

From cash to contract hire, there’s more than one way to buy a new car. But which option is right for you? We examine the pros and cons.

Figures from the Finance and Leasing Association show that more than 75% of new car sales bought on finance through dealerships in 2014.

Car showroom

Most new cars are now bought on finance through dealerships, such as PCPs

But rather than traditional hire purchase (HP), where you pay for the car in instalments until you own it outright, most sales have been via personal contract purchase (PCP) deals. 

PCPs offer lower monthly fees, with a large ‘balloon’  payment at the end of a fixed (typically three-year) term to buy the car. However, few people make the final payment – they simply hand the car back or trade it in for a new one.

Already widespread in the US, leasing, or personal contract hire, has also taken off. Effectively long-term car hire, with no option to own the vehicle, it gives flexibility and fixed costs, as maintenance is often included.

According to Rupert Pontin, head of valuations at Glass’s Guide to Car Values, attitudes are changing. ‘Consumers have become accustomed to buying high-priced products and services on a pay-monthly basis,’ he explains. ‘Owning a car will very likely become a thing of the past for most people.’

But while the idea of a new car every few years is undoubtedly appealing, it’s important to consider the total cost. Those low monthly payments can disguise a much greater outlay overall. 

Five ways to pay for your car

Pay cash

Pay cash

PROS The cheapest way to buy in the long term. No monthly repayments. Less paperwork to fill in.

CONS You must pay the full cost upfront. It could mean spending savings and losing interest. Cars depreciate – investing in an appreciating asset (such as your home) may be wiser if you can also afford to pay for a car on a monthly plan.

VERDICT The simplest and cheapest way of buying a new or used car, if you can afford it.

Bank loan

Bank loan 

PROS Spreads the cost over time. You can shop around for the best loan. Often cheaper than dealer finance. You can still push for a ‘cash discount’. 

CONS Cost of credit varies widely. Difficult with a poor credit rating. As with cash, you bear the brunt of any depreciation.

VERDICT A sensible option if you don’t have the means to buy a car in one go. Be sure to shop around, though.

Hire purchase

Hire purchase (HP)

PROS You buy the car outright, in instalments. Easy to arrange via car dealer. You can return the car part way through the repayment plan.

CONS Can prove a lot more expensive than a bank loan. Servicing may cost extra – check the T&Cs. You don’t own the car until the final payment is made – the car can be repossessed if you don’t pay.

VERDICT A loan could save you £1,000s vs HP.

Personal contract purchase

Personal contract purchase (PCP)

PROS Low monthly payments – you’re hiring the car for most of the deal, with the option to buy at the end. You can get a new car whenever it suits you – even every year. Competitive deals.

CONS Servicing unlikely to be included. Mileage limits will apply. ‘Balloon’ payment at the end. 

VERDICT A tempting way to drive a new car every few years, but don’t forget the ‘balloon’.

Leasing

Leasing

PROS Monthly payments are low. Servicing is often included. It’s easy to change cars, with no need to buy or sell.

CONS You don’t own the car, no matter how long the lease. A large upfront deposit is usually required. There may be a mileage limit – with penalties if you exceed it.

VERDICT The most convenient way to drive a new car, but unlikely to be the cheapest.

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