I've always bought my cars using cash but am wondering if there are there any circumstances under which it is better to buy a new car using credit of some form as opposed to using cash which is readily available and not required for other purposes ?
Are there any significant advantages of purchasing using one method as opposed to the other ?
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Its quite simple really, the only factor is economic. That is when credit is cheaper than cash. The only time this happens is
a: if you get get a better purchase price thro using finance and the total cost over the loan length is less than a cash sale would have been
b: Interest free credit - but watch out for "hidden" costs
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A credit purchase is best when there is a 0% finance deal on offer. Also if the car proves to be a pup then under the consumer credit act the finance company are jointly liable along with the seller to make sure that the car is repaired/replaced. Have the cash lump sum in a savings account but still buy on finance that way you can earn interest on your capital that you would have otherwise used to purchase the car and you have the repayments available in case something untoward should happen. If you do a finance agreement make sure you can pay it off in full without penalty at any time during the agreement. Plus if you have cash to cover all your liabilities you are in a better financial state of health compared with someone earning the same money, with the same loan but who hasn't got that cash available.
If you want privacy or find that any debt is a weight on your mind then cash is always king.
teabelly
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Thanks T & RF. So if one wanted to buy a new car and get the best deal is it possible to say which method is likely to yield the best result or is it a case of 'suck it and see' at the time. It used to be the case that a discount was negotiable for cash - I tend to think that isn't the case any more - is that true ? As regards the extra consumer protection afforded by using a finance company, would using a credit card to pay the deposit, for example, give the same result ? Thanks again.
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VM,
As long as you are sure you are not getting screwed on purchase price, or lack of discount I would favour a 0% finance deal, IE largish cash desposit, balance financed at 0%, and the money you would have spent but financed instead placed on deposit somwehere earning interest. That way you also get the benefit of the consumer credit act.
BUT 0% finance deals cost the garage or the manufacturer money so find out where they are getting the payback from if they are.
I could be wrong but i think credit cards are governed by the consumer credit act so all same rules apply as finance
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I would imagine a dealer would prefer you to take credit as he gets commission on the deal and can therefore offer a lower screen price on the car. He needs to make £X on the deal. If it is a cash deal then he'll have less leeway to negociate down. The finance company commission has to be paid for, however and unsurprisingly it comes out of your pocket, one way or another. As previously stated, watch out for 0% finance deals, there may be extra fees or some small print which may catch out the unwary.
The bottom line is:
the dealer has to make a profit;
the finance company has to make a profit.
Personally I'd rather pay cash if I had it available as it reduces the profit makers to one. Any loss of interest on the cash will be less than the apr on a loan.
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Oh Forgot
Re the discount for cash, not always the case. The garage sometimes gets a kick back from the credit company for selling a new loan so you may get a bigger discount on purchase price. But as always work out the total cost of purchase including finance to see if it suits. If doing a part ex always go on the "cost to change" including any finance charges.
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If you plan to p/ex, don't mention this initially. Negotiate the best deal possible on the new car and then ask how much they will give for the old car. It will be low but you will know the true figures for the purchase and disposal and can judge e.g. whether to sell privately. Dealers love part exchanges as they can hide the figures and make a poor deal seem more attractive.
You also save VAT by getting a big discount.
Apologies for wandering away from your question.
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RF - interest free with a LARGE deposit defeats the object of interest free credit. Even if you have the cash, you should sign up to as much as possible on the monthly payments and deplete your savings to make them (as long as it's interest free of course!) as that way you're collecting the interest, not them!
Also, if a car is sold on finance, the repayment penalties (if any) plus the first month's interest may be less than the extra discount you can negotiate. I don't think there's any way of knowing though.
I can't ever remember seeing a used car on interest free credit where the interest wasn't built into the deal (and then some!), even if you were coming with a small deposit. If you're buying new, it may be different, because basically all cars of that kind will have the same deal available.
Strictly speaking, under the Consumer Credit Act, dealers aren't allowed to offer you a reduced price for cash vs. credit, but as long as they don't tell you that, you'll never know about it, so there's not much that you can actually do.
My advice is probably to keep it simple for cash, or to pay off credit early if you want to risk £100 or so in the hope of saving £200-£300.
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RF - interest free with a LARGE deposit defeats the object of interest free credit. Even if you have the cash, you should sign up to as much as possible on the monthly payments and deplete your savings to make them (as long as it's interest free of course!) as that way you're collecting the interest, not them!
Absolutely true, but I think RF was making the point that dealers usually tend to offer 0% with terms such as 50% deposit and repayments over 12 months to minimise their loss on the deal.
I would go for cash. The dealer ultimately wants the same profit so 0% interest could in theory be swapped for a discount. Then comparing a loan rate of 7% APR against a savings rate of 4% makes the cash deal cheaper.
Furthermore, if your ISA limit is used up, there is the tax effect as you pay tax on interest received but don't get tax relief on interest payments made (7% loan vs 3.2% savings for basic rate taxpayer).
A situation that may be useful for buying on HP is because of the rule where the car can be handed back after 50% of payments have been made. This mainly only applies if you really want a depreciation dog.
James
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Agree although 0% finance on a new car is frequently a manufacturer initiative that is basically 'take it or leave it' and not funded by the dealer in any way, so they can't offer any more off whether or not you take it.
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