Is car finance worth it?

The car finance market is huge in the UK and it’s very common to use a car finance deal to get a new car. In fact, 93% of new cars were bought through a car finance or leasing deal in the 12 months to April 2021, according to the Finance and Leasing Association, instead of cash upfront.

If you’re thinking about using car finance, it’s important to look at all of the costs involved to make sure it’s the right option for you. Here we look at when car finance might be worth it and make financial sense, and then look at the times when an alternative option might be more appropriate.

When is car finance worth using?

The reason car finance is popular is because it allows people to buy a new, or used car, without needing to pay a significant sum upfront. You may want to consider car finance in the following scenarios:

I need a car but don’t have the cash to buy one outright

If you haven’t got the cash or savings to buy a new car outright, using car finance is another option. There are many types of car finance available which will spread the cost of the car over monthly repayments. Whatever finance option you choose, you’ll normally need to pay a deposit upfront, but this could be more affordable than paying out for a new car in one go.

Taking out car finance and paying for a car over a period of time can also enable you to buy a more expensive and better quality car than you may have otherwise been able to. However, you should always make sure you can afford the repayments.

I can comfortably afford the repayments

You’ll need to show a provider you can comfortably make repayments towards a car finance deal through your regular income. If you are happy making these, and it doesn’t leave you short elsewhere, it can be a good alternative to buying a car outright.

Work out your budget so you know exactly how much you can afford to spend on car finance payments. From this, you can then see if car finance is a realistic course of action, or if you need to reconsider your options.

» MORE: What checks are done for car finance?

The interest rate on a car finance deal is my cheapest option

It’s important to look at the interest rate a provider will charge so you know how much you will be paying overall. This rate will depend on your credit score, with the best rates reserved for those with excellent credit scores.

Compare car finance deals from different providers, as well as the rates you could get from personal loan providers, to help you work out what the best option is. Because car finance is secured against a vehicle, those with less-than-perfect credit scores may find car finance cheaper than an unsecured personal loan.

» MORE: Car finance vs personal loan

I want to be able to change my car regularly

Cars depreciate over time so, if you buy one outright, you’ll lose money if you then want to sell it soon after and buy a new vehicle. If you take out a personal contract purchase (PCP) car finance deal, you have the option of returning the car at the end of the contract term. You can then choose to take out a new PCP deal on a new car.

You can also return your car at the end of a hire purchase (HP) agreement, although HP finance is intended more for people who want to eventually own the vehicle.

Leasing a car may also be an option to consider but more suited to those who want to change their vehicle on a regular basis. When you lease a car on personal contract hire, you can regularly upgrade your car because you have to return the car at the end of the term; there is no option to own it.

» MORE: Should I lease or buy a car?

When is car finance NOT worth it?

Car finance isn’t right for everyone, and the following examples show when it may not be worth getting.

I’ve got the cash to buy a car outright

Buying a car outright is the cheapest option if you want to own your car and keep it for a long period of time. This is because you can use your cash or savings to buy the car, without needing to pay any interest on top of this.

I’ve been offered a cheaper rate from a bank for a personal loan

The best rates on personal loans are available for those with excellent credit scores. If you have a good credit score and can access the best interest rates, personal loans are often cheaper overall than car finance. You can get an idea of what rate you’ll be offered by using a free eligibility checker. These don’t impact your credit score and can give you an idea of the costs you’re likely to pay and the loans you may be approved for.

I want to own my car from the start

Although you can eventually become the legal owner of your car after buying it on finance, the finance provider owns it while you are making repayments. If it’s important for you to own your car from the very beginning, then car finance may not be right for you. Instead, you could use your own money to buy a car, or take out a personal loan.

Also, when you own your car, you can choose to modify it or sell it whenever you like. You won’t be subject to restrictions, such as mileage limits, that may be part of a car finance contract.

I would struggle to afford the repayments

When applying for finance, you need to be confident that you will be able to make the repayments. If you miss one or more payments, this will affect your credit score and the finance provider could repossess your car.

So, if you think your circumstances might change and you may struggle to make repayments, then taking out a car finance agreement may not be right for you. Although you can cancel car finance, you should only apply for finance if you are confident about being able to repay it.

You could choose a cheaper car, increase your deposit, or adjust the term of your loan to try to lower your monthly payments and see if that makes car finance a more affordable and viable option.

» MORE: Calculate how much you can borrow

Should I get a car on finance?

Ultimately, whether car finance is worth it and whether it is the right option for you depends on your individual circumstances. You will need to consider:

Your credit score.
Whether you want to own the car.
How often you will want to change your car.
Your income and how much you can afford to spend on repayments.
How much money you have saved, to either buy a car outright or to put towards your car purchase.
Your immediate to long-term financial plans, like buying your first home.

Image source: Getty Images

About the Author

Rebecca Goodman

Rebecca Goodman is a freelance journalist who has spent the past 10 years working across personal finance publications. Regularly writing for The Guardian, The Sun, The Telegraph, and The Independent.

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