Lend or Spend: How Should I Pay For My Car?

By Rosie Earl

With different options available, what's the best way to pay for a car without getting a financial headache?

Buying a car is a serious and often necessary investment. Using cash or savings will nearly always be the cheapest way to buy a new or used car, but isn’t possible for everyone. Before deciding whether to pay cash or to borrow, what considerations should they follow to help them avoid financial headaches in the future.

Flashing the cash

If you have the funds available, cash is the ideal way to pay for your new car. You make one payment, and the vehicle is yours. You don’t have to worry about monthly payments, or what will happen if your financial situation changes, for example if you lose your job. You own the equity in it, so if you were in serious financial difficulty, you could always sell it and recoup the money.

Savings aren’t working hard

At the moment, savings accounts aren’t working very hard for their owners, and using your own money can be more cost effective than taking out a loan. For example, the highest APR savings account on Money Saving Expert (at the time of writing) is 1.05%. If you had £5,000 in that account, you would earn about £4 per month in interest. The cheapest loan for £5,000 on the same website is 3.3% APR, which would cost you £11 per month. The amount you’re charged in loan interest will always be more than you will earn in savings interest, so if the money is available, it is more beneficial to use it.   


Prepare for the worst

This makes buying a car with your savings a tempting option. However, it is sensible to make sure that you don’t throw every penny you have at the car. Instead, make sure you have enough money left over to deal with any unexpected costs that might arise. The Money Advice Service suggests ensuring you have three months’ worth of essential bills money saved, in case the worst should happen. Cars are incredibly vulnerable to wheel damage, scratches and bumps, and having this financial buffer will take some of the stress off if the worst should happen.

Best for your Budget

Establish a budget, considering how much money you can afford to spend, either on the whole car or on your deposit and monthly payments. If you have limited funds, you may decide that long term, putting down a deposit and borrowing some money might buy you a better, more reliable vehicle. For example, I wrote off my first car in an accident, and had to buy a cheap car very quickly with the limited money I had, or I wouldn’t have been able to get to work.

I bought an old Ford KA for £1,000, making a huge dent in my savings. That lemon had cost me more than £3,000 in a year because anything that could go wrong with it did go wrong. I had to borrow a fortune from the bank of mum and dad to pay for the constant repairs it needed as it hemorrhaged money. Looking back, I think I would have been better off putting down my £1,000 as a deposit, and borrowing money to get something more reliable.

Flirting with finance

If you can’t afford to pay for your car up front, finance from the dealership or a loan might be a good option for you.

Repaying your debts

Like any form of borrowing, you won’t actually own the car until it is fully paid off, and it is at risk of repossession if you can’t keep up the repayments. If you chose to trade in the car before the term of the finance was up, you would still be responsible for paying back the finance company the outstanding funds. This can be risky, as cars famously depreciate the older they get. If, for example, you borrowed £5,000, paid off £2,500 and then could only sell it for £2,000 you would end up out of pocket, as you’d have to find an extra £500 to pay off the finance.  


In your best interest

The other pressing point about finance is that it usually comes with some form of interest to be paid. If you choose to take out a bank loan, this is inevitable, however some dealerships offer 0% finance for either the first year or, in some cases, the term of the finance. The best interest rates are usually offered to the people with good or excellent credit rating, so giving your credit score some TLC before you apply for finance can be really beneficial.

Loan Ranger

If a 0% finance package isn’t available, then a bank loan with the lowest possible interest rate is another option. When applying for a loan, consider both the monthly repayments and the length of the loan.

The repayments should be comfortably affordable within your usual monthly budget, and the length of the loan shouldn’t run for longer than you expect to own the car. For example, if you buy a car that is already 10 years old, it’s unlikely to last seven years, unless you’ve very lucky. If you take a loan for this car over seven years, you could find you’re still paying for it long after it’s gone to the big scrap heap in the sky!

Top Takeaway

- Cash is a great option if this is available, as you will own the car outright and won’t need to worry about monthly payments

- Make sure you have enough left in your savings to act as a buffer if things go wrong

- Look for 0% or low interest finance deals, which will be more readily available to those with a good or excellent credit score

- Try to avoid loan terms that last longer than you expect to own the car, to avoid still having the debt after you’ve traded in the car


Author bio: Rosie is a massive geek who loves anything Hello Kitty or penguin related. She writes every day and wants to be Caitlin Moran when she grows up. If she was an animal, she would be a baby dragon (with a solid background in finance). The Sorting Hat would have put her in Hufflepuff, and she is cool with that.

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