How important is it to own a car outright?

How important is it to own a car outright?

29 September 2022 Concept Car

You will sometimes hear people say that the only right way to buy a car is to pay for it in cash:

  • Buying a car outright is far cheaper than buying it on finance.
  • Buying a car outright allows you to do with it what you want. This includes driving as many miles as you like, changing it and selling it if you should run into financial trouble.

Are they right? In this special on buying a car with cash, we won’t just answer that question. We’ll also fill you in on all the pros and cons so you can arrive at the best possible decision for yourself.

As a little spoiler: We won’t contest that these points make a lot of sense. BUT we do take a different point of view.

Buying in cash only makes sense under very specific conditions.

And it only makes sense for a small group of buyers. There are even cases where not opting for car finance can be outright dangerous.

If you’re reading this and your finances are currently under a lot of pressure or if you’ve had financial problems in the past, then it’s probably best and safest to apply for a loan instead.

As you can see, the details really do matter.

Which means that reading this feature can save you hard earned money and protect you against costly mistakes. Does that sound good? Then read on!

Let’s start with a perhaps surprising statement:

Car finance is the natural way of paying for a vehicle.

Think about it: At the dawn of the industry, there was no way more than a mere handful of extremely rich people could ever hope to afford their own automobile.

When Ford introduced its Model T, part of its success was that this car made ownership possible by a combination of extremely affordable prices and a weekly payment plan. This gave workers access to something they would never have been able to afford otherwise.

Still, as the middle class became more wealthy and confident, especially in the 1950s and 60s, paying in cash became more popular.

It turned into a display of your financial status and it was also a fantastic tool for haggling. Effectively, for those with enough liquidity, paying in cash could bring down the price of a car considerably.

In the 1980s, paying in cash was still a relatively familiar approach.

Since then, cash has increasingly come out of fashion. Why is that?

There are many different reasons for the steady decline of the cash model.

At the top of the list is the fact that income distribution, by the end of the 80s, had become extremely unequal. There were now more super wealthy consumers than ever and more outright poor ones. As the 90s progressed, the middle class started to erode.

In short: less people were able to afford cash payments.

Secondly, cars were becoming less accessible. All manufacturers started improving their quality control, resulting in increasingly more reliable models. But the lower tier of the market, which provided an easy entry point and an alternative for those with limited budgets, got smaller.

For most, even the cheapest cars were still too expensive to buy from their savings alone.

2022: Why would you want to pay for a car in cash?

This is a fully justified question. Car finance has never been more diverse, there are numerous loan options at your disposal. And if push comes to shove, you can always opt for renting a car on a case by case basis.

Let’s look at the main arguments made in favour of the no-finance-approach. After all, it does still have its merits.

Pros of buying a car outright #1: It may be the only way to pay!

This is an easy one. Even today, there are still a few situations where buying a car is literally the only option at your disposal.

Two in particular come to mind:

  1. Buying a used car on the private market. When looking for the cheapest possible way, purchasing directly from the owner of a car is the obvious choice. These transactions are, however, always conducted in cash. There is far too much risk involved for anyone to offer you a “weekly payment plan” like Ford once did for its own employees. So, if this is the route you want to take, then cash it is.
  2. Buying a car if you can not get credit. Admittedly, this is a rare case. Especially since there are more than enough dealers who will help you even if your credit score is bad or if you’ve been declined everywhere else. However, it does happen that some drivers don’t have a job and no regular income but a sizeable amount of money on the bank. If no one is willing to lend them the money, cash is their only respite.

Usually, however, cash will be an option you can either embrace or reject.

Further Reading:
Dealership vs private seller: 9 Questions you NEED to ask yourself
Covid Questions: Can I buy cars on the private market during the lockdown?
How the Internet changed the used car market

Pros of buying a car outright #2: No interest

Paying for a car in cash is the cheapest solution bar none.

Since you don’t have to borrow the money, you won’t have to pay any interest. The price that’s on the tag is the price you’ll pay, barring any service fees or additional guarantees.

Ultimately, if you pay by cash, you only pay what you have. That, in itself, is a very smart concept.

Further Reading:
Negative Interest Rates: Will They Destroy Car Finance?
Do THIS to improve high interest rates on bad credit car loans!

Pros of buying a car outright #3: No limits

“There’s no limit” 2Unlimited claimed in one of their biggest hits in the 90s. Were they talking about cash payments?

One thing’s for sure: Buying a car outright means you won’t have to ask for permission to add a few extras or take out things you don’t like. And when it comes to mileage, you can drive the car for as much or as little as you want. Because it’s yours.

This may sound like a fantastic benefit, but on closer inspection, it’s not all it’s often made out to be. Mileage limits are rarely an issue, unless you’re a frequent or long-distance driver. You can easily add extras or make changes on loan-financed cars, too. Only PCPs, HPs and similar leasing or renting based models are problematic here.

Paying by cash may mean no limits. But the limits of car finance are not strict enough to dedicate a song to them.

Pros of buying a car outright #4: Not locked into a contract

This is a more serious pro of cash payment.

Especially with PCPs, many drivers tend to get locked into their car finance contracts. At the end of the current one, they’ll instantly sign for the next, never actually owning a car outright.

In itself, this can be okay, if PCPs are best for you (although we’d dispute the notion that they ever are). But it does mean that you’ll never ever reap the benefit of full ownership: Driving a car without having to pay interest.

Ownership means that there is a clock ticking away in the background. You can decide to keep your car until its wheels fall of and no one’s going to think any worse of you. And if you should decide to switch to public transport or your bike after that, then you can do that, too.

That said, car finance, if done right, can yield the exact same benefit.

Further Reading:
Experts warn: PCP and HP are the Road to Ruin
What’s best: PCPs or used cars?

Pros of buying a car outright #5: Sell at any moment

This may be the number one argument in favour of getting a car without resorting to a loan:

We’re living in the age of uncertainty.

  • A recession could strike at any moment.
  • You could lose your job.
  • What happens if your income crumbles or disappears?

With a car that’s 100% yours, you can always sell it at any moment to generate cash. That’s an incredibly comforting thought in these troubled times. And it’s the one thing you really can’t do with any car finance arrangement. Although some PCPs have provisions which make termination easier, they won’t actually provide you with the cash you may need.

Some of the pros we just talked about may seem pretty great. Let’s now, however, look at the flipside of the coin: The reasons against owning a car outright.

Cons of buying a car outright #1: Risk of over-spending

This sounds like a strange argument. Didn’t we just say that paying in cash was a way to avoid over-spending?

Well, yes, in the sense that you can’t spend more than you have. However, you can spend almost all that you have. And that is a pretty bad decision, too.

Just because you’ve bought something by cash doesn’t mean that it didn’t hurt you financially. A car comes with monthly expenses, from insurance to repairs and check-ups. And petrol, of course, which can quickly add up at current prices.

Buying a car outright makes a deep dent in your savings. So you need to be absolutely certain that you can afford that dent before taking the plunge.

Cons of buying a car outright #2: Depreciation

Buying a new car comes with a major caveat: Once you’ve signed the paperwork, it starts shedding value rapidly. There’s nothing you can do about that. Depreciation is a fact of life and nothing can change it.

Now, obviously, depreciation will affect you in any case, whether you buy a car outright or not. But in the former case, you will feel the effect most strongly. And it will put you at a serious risk.

Imagine paying for a car in cash this year. Then, out of the blue, the global crisis situation escalates and you lose your job. Sure, you can now sell the car and get back some liquidity. But if you do that, you’ll have made a huge loss.

With a car finance deal, you’ll clearly struggle in this situation as well. But you may be able to either keep up the payments, if you’ve set them at a reasonable level. Or to renegotiate the contract to bring down the rates.

Further Reading:
Used car depreciation: Value killer number one!
Trust us: You don’t want to beat depreciation!
Car Depreciation: Mileage vs Age vs Condition

Cons of buying a car outright #3: You’ll get a less desirable car

Buying a car is a major investment. So cudos to you if you can afford to make that investment in cash.

That said, there’s every chance that you won’t be able to get the best possible car for you this way. We’re not even talking dream cars here. Even some less popular, second hand models can be out of reach if you want to buy them outright.

It is precisely for this reason that PCPs have quickly turned into the most popular way to finance a car in the UK. They make it possible for almost anyone to walk into a dealership and drive home with an incredible new car.

Now, we’re not saying that’s realistic or a good thing per se. But it does mean that if you opted for a sensible financing option, you could still get a better car at reasonably higher costs.

Cons of buying a car outright #4: Alternative investment losses

For the past few years, interest rates were very low. This made ownership seem pretty attractive. After all, what good was it to have all that money lying on the bank if it didn’t “work” for you there?

Things have changed, however.

Today, inflation has risen to remarkable levels and the Bank of England has announced it will increase its base rate of lending over the next few months. As a result, you may actually stand to gain something again from saving.

So, instead of paying everything upfront, you could instead opt for a loan with a decent interest rate and then search for the best investment option. Even if cash payment should remain cheaper, you may only lose a few Pounds on car finance – with all of the added benefits.

Cons of buying a car outright #5: Not building credit

It may sound strange, but a loan is actually a great way to rebuild your credit rating.

This is because a loan equals regular payments. And each time you make a payment on time, this adds points to your score.

Paying in cash is seemingly the more mature way to purchase a vehicle. But it won’t help you get back on track if your goal is to improve your creditworthiness!

Further Reading:
How to improve your car credit acceptance chances
How to improve your credit score

So what’s the verdict?

At Concept Car Credit, we believe that outright ownership can be beneficial for some. But generally speaking, taking out a sensible loan and then paying it back reliably is better.

We usually recommend searching for the best of both worlds. Here’s what most of our clients opt for and tend to do best with:

  • Make a reasonable, meaningful down payment.
  • Set the monthly payments at a sustainable level.
  • Select an affordable car that meets all your needs and is reliable.
  • Pay back the loan.

If you’ve been rejected before or have a bad credit, we’ll gladly help you get behind the wheel again.

Get in touch with us now.

You can always give us a call at 0800 093 3385.
Or write to us using our contact form.

29 September 2022 Concept Car