Illustration by Priya Mistry

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Buying a car is one of the biggest expenses you will probably have. When deciding whether or not to take out a finance loan, there are pro’s and con’s you should consider, especially if this is your first time:

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Pros

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1. You can buy a nicer car

Choosing a finance plan allows you to opt for a better or newer car. With a newer car you eliminate a lot of risk of things packing up, or being irrepareable. This could save future costs of having to get things fixed or obtain difficult to find car parts.

There is also intrinsic value to a good car. A car to some people is more than just a transport vehicle, and finance plans would allow you to enjoy the luxuries of a good car without the instant huge hole in your pocket.

There are also options such as personal contract hire (PCP), where you can return the car for an upgrade every couple of years. This is good if you’re the type to enjoy getting new cars often.

2. Spread out your payments

As assumed, there is the benefit of a spread out payment. This means that you won’t have to see that dramatic lump sum leave your account all at once! There are options to choose from based on your own personal requirements, and you can even find some lender options that don’t require deposits. There are a few different financing options that you can read further about here.

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3. Improve your Credit Score

A finance plan would add to your credit rating, assuming you maintain timely payments. This helps show that you are a reliable borrower, and would boost your credit score making it easier to take out other loans such as a mortgage. You would need to keep this in mind if you were planning on delaying any payments! It could negatively impact your reliability which would make it harder to get any future finance.

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Cons

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1. Car running costs

The current fuel prices make everyone want to cry. That being said, running costs of a car are quite high, and entail things such as insurance (a huge cost in the UK, especially on newer cars), fuel, cleaning, MOTs, road tax and sometimes repairs. On average, a car owner in the UK spends 3000 a year on running the car alone. This then needs to be added to your outgoings, along with your payment plan.

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These running costs also vary with model. If you opt into a plan that has an upgrade every few years, these costs will change and likely increase with a newer car. This is something to keep in mind when deciding what type of plan to choose.

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2. Car devaluation

Another thing to consider is the fact that you are liable for any repairs that the car may require. If you think you are a bad driver and you manage to hit the curb all the time, you might want to factor this into your decision. Any devaluation of the car is also your responsibility, such as exceeding your set mileage allowance in PCP contracts. Since you aren’t keeping the car the lender company would want it back at a profitable value, so this becomes your responsibility.

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There are also some contracts where you wouldn't be able to make any cool car modifications, so your lowered suspension dreams would need some research beforehand. 

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3. New cars lose value immediately

If you’re choosing a brand new car bought on finance over a second hand car that you could buy outright, you might want to factor in the depreciation of the car’s value. It is known that a brand new car loses 10% of its value from the second you drive it out of the dealership. By the time you’ve had it for a year it would probably be down 10-20%, and in 3 years around 60% which is nearly its whole depreciation value. If your plan was to take out finance such as a personal loan and pay for it, your resale value would not cover this.

To simplify this: A car worth 15,000 would depreciate 10% as soon as you buy it, leaving its value at 13,500. In a years time it would be worth 20% less, which is 12,000. Suppose after a year you’ve decided you don’t want it, but you still have to repay your loan worth 15,000 (plus interest). The most you will probably get for it is 12,000, which leaves you with 3,000 debt (and whatever remaining interest as well). 

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On the other hand, an old, second hand car could have cost you 8,000 outright. If this car is older than 3 years, it is likely to have already depreciated as much as it will in its lifetime. You could buy this and potentially sell it in a year for a minimal depreciation, or even for a profit if you manage a good deal! 

This is an important thing to consider not just when choosing a payment plan, but also choosing what type of car to buy.

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