Should you buy your car outright or use car finance?

    2 March 2020

    Even though I am a resolute petrol head, I have owned an electric car for over ten years. And, in the light of the government’s new net zero target, it’s looking like more of us will be venturing into electric vehicle ownership in the near future.

    In the decade since I bought my electric car, the technology has developed very quickly indeed. As a result, the depreciation on older cars has accelerated. When you buy a new car, you are purchasing a wasting asset. Consequently cars are a lifestyle choice rather than a bankable investment and, in this light, a subscription model makes sense.

    With that in mind, the calculation you need to make is how long you will own the car, what you spend now compared to what it will be worth in two, three or four years when you’d probably want to change it.

    If you are the sort of person who likes to own a car for a decade, perhaps it’s worth buying outright. If you have the means and are not mortgaged to the hilt, you could extend your house mortgage and simply use the extra cash to buy your car. If you have a low salary but a high bonus element, you may be better off simply saving and buying the vehicle. If you are self-employed and use a car for work, an electric car and finance are often more tax efficient.

    For the past decade I have used some form of vehicle finance. On occasion I have paid off the finance over a three year period and kept the vehicle beyond. And I have taken advantage of the model that likes to see vehicles recycled on a finance package.

    With car finance, you have to bear in mind that you will pay more for your car overall than buying it outright and weigh this fact up against the benefit of spreading the payment over multiple years. Never take the offer from the dealership without checking online as to whether you can get a better deal. Similarly, be careful with the end values ascribed to a car you buy. It’s better to have a more realistic end value if you want to be able either to purchase it outright at the end of the deal or to use the residual value to flip into a new deal.

    For most of us car finance is the best way to buy a new car. There’s something to be said for pursuing a car that’s low mileage and second hand without a finance deal attached – that’s if you aren’t fussed about having the very latest model. There are plenty of incredible machines that have been rinsed of up front value that will do the job.

    If that’s not for you, here are my top tips.

    The pros

    1: Allows you to free up cash for other things
    2: Takes the burden of sale away from you and gives you the ability to plan for your next car
    3: Puts the risk of depreciation on the vendor allowing you to get the very latest model
    4: It can be tax efficient
    5: Better for managing personal cashflow

    The cons

    1: May limit what you can borrow on a mortgage
    2: Locks you into the deal that can be expensive to get out of
    3: You’ll be paying more for your car
    4: If you’re a high mileage driver, it can be expensive if you breach the limit
    5: Increases your monthly outgoings

    My final piece of advice would be to decide what’s important to you. Do your research not only on purchase costs but depreciation and running costs. Think about second-hand values and brand value too and what you want to use your car for. Done in the right way, car financing can spread the payment of one of the most expensive things you might ever buy, allowing you to get something a bit more fun and exciting whilst freeing up your cash to spend on other things. Winner!