Buying a New Car: Cash Vs Auto Finance

Deciding how to pay for a new car is one of the biggest financial decisions you'll make. Should you pay cash upfront or take out a car loan (auto finance)? There are pros and cons to both options. Here are some key factors to consider when choosing cash vs finance for your new car purchase.

Cash Payment

Paying the full amount for a new car in cash allows you to avoid interest charges and monthly finance payments. This can save you thousands of pounds over the lifetime of what a car loan would cost, depending in the interest payable with a finance deal.

Advantages of paying cash:

  • No interest or finance charges. This saves you significant money compared to taking a loan.
  • Full ownership from day one. You have the title and keys as soon as you hand over payment. 
  • Flexibility to sell whenever you want. There are no loan terms restricting when you can sell.
  • Builds savings discipline. Paying in cash forces you to save up instead of getting a loan.
  • Potentially negotiate a lower price. Dealers may come down on price if you pay upfront in cash.

Disadvantages of cash:

  • Large upfront payment needed. You'll need the full purchase amount accessible.
  • Opportunity cost of using savings. That cash can't be invested or used elsewhere.
  • No credit score improvement. Paying cash doesn't help build your credit history. 

Auto Finance

Getting an auto loan allows you to pay for your new car over several years through monthly payments. While interest charges apply, this spreads the cost out over time. That said, it’s important to shop around, as not all car finance deals are equal. For example, if you live in Scotland, check out all the dealers in your local area for the best value car finance in Scotland.

Advantages of auto finance:

  • Smaller initial payment. Often just a deposit, e.g. 10% of the purchase price.
  • Fixed monthly payments. Easier to budget than a large one-time cash payment.
  • Builds credit score. Responsible repayment improves your credit report.
  • Lower opportunity cost. You keep more savings invested or in the bank.
  • Covers depreciation period. By the end of the loan term, the car has depreciated significantly in value.

Disadvantages of finance:

  • Interest charges. This increases the total amount you pay over the loan term.
  • Loan approval required. Lenders will check your credit history and income level.
  • Early repayment charges. Paying off the loan early may incur fees.
  • Restrictions on selling. Loan terms may limit your ability to sell the car.
  • Debt obligation. The loan is a commitment for several years of payments.

Weighing Up Your Options

There are good reasons to pay cash or opt for financing. Consider your own financial situation and priorities. Make sure to get quotes from different lenders and negotiate the best deal. Do the maths to understand the total costs and how much you'll really pay over time. An independent financial advisor can also help assess which option makes most sense for your circumstances.