Best way to finance buying a car
Buying a car is no simple decision. From buying outright, to buying a car on finance, there are many options. You also have to consider running costs. In fact, it’s probably the second most expensive thing you’ll buy after a home. So it’s important to make sure you choose the best way to buy a car for you.
Cash or savings?
Use our Car costs calculator to work out the total cost of motoring.
The cheapest way to buy a car is to fund it all or in part in cash.
This is because any loan or financing agreement will involve you paying interest.
- Make sure you have enough saving left over for an emergency after you have paid for your car.
- If you don’t have enough savings to buy the car in full, you could use them to give you the biggest deposit possible.
- Even if you use money from your savings you might be better off buying the car on your credit card so you benefit from credit card purchase protection. You should pay the bill off in full the next month.
Personal loans are usually the cheapest way to finance a car deal, but only if you have a good credit rating.
You can get a personal loan from a bank, building society or finance provider so long as your credit rating is good.
Make sure the loan is not secured against your home. Otherwise you’ll be putting your home at risk if you failed to keep up with repayments.
Shop around for the best interest rate by comparing the APR (or annual percentage rate, which includes charges you have to pay as well as the interest).
- It can be arranged over the phone, internet or face-to-face
- Covers the whole cost of the car but it doesn’t have to
- Can charge a competitive fixed interest rate if you shop around
- There might be a wait for the funds to appear, but some lenders make funds available almost immediately
- Other borrowing might be affected
Hire purchase (HP)
Hire purchase is a way of buying a car on finance, where the loan is secured against the car.
This means you don’t own it until the last payment has been made.
These are normally arranged by the car dealer, so are convenient to arrange and can be very competitive for new cars, but less so for used ones.
- Quick and easy to arrange
- Low deposit (usually 10%)
- Flexible repayment terms (from 12 to 60 months)
- Competitive fixed interest rates
- You don’t own the car until the final payment
- Tends to be more expensive for short-term agreements
Personal contract plan
This type of car finance deal is a variation on hire purchase and tends to result in lower monthly payments.
Instead of paying for the car outright, you agree to pay the difference between its sale price and its price for resale back to the dealer.
This is based on a forecast of annual mileage over the term of the agreement.
At the end of the term you can:
- Trade the car in and start all over again
- Pay the resale price of the car and keep it, or
- Hand back the car to the dealer and pay nothing
- Lower monthly payments
- Low deposit (usually 10%)
- Flexible repayment terms (from 12 to 36 months)
- A choice of what to do at end of repayment term
- Mileage and condition of car affects the costs
- Total amount paid might be more than with hire purchase
- Have to pay the outstanding balance to keep the car
You pay the dealer a fixed monthly amount for the use of a car, with servicing and maintenance included, as long as the mileage doesn’t exceed a specified limit.
At the end of the agreement, you hand the car back. It never belongs to you.
- Motoring at a fixed monthly cost
- No worries about the car depreciating in value
- Flexible payment terms (from 12 to 36 months)
- Monthly costs are higher because servicing and maintenance are included
- Need to find a deposit (usually 3 months rental)
- Possible extra costs if you exceed the mileage limit
- The car is never yours
Getting a car on finance: things to look out for
As you compare car finance deals, there are a few key things to do before making a final choice.
- Make sure you can afford the monthly payment.
- Compare the total cost of borrowing, including all charges over the loan.
- Beware of early repayment or other charges, which kick in if you exceed the forecast mileage in personal contract plans (and also personal leasing).
- Compare interest rates by looking at the APR (annual percentage rate), which includes all the charges you have to pay. Remember a higher deposit will normally mean a lower interest rate.
- Think carefully before buying payment protection insurance (PPI) or other insurance, such as GAP cover, which can be expensive and might give limited cover. GAP cover is designed to pay out if your car is a total write-off and the outstanding finance is more than the value of your car.
Using your savings is the cheapest option for buying a car, while personal loans are usually the cheapest way to borrow to buy a car, but only if you have a good credit history.
If you have a bad credit rating, you might need to choose one of the alternative financing methods to buy a car.
The best way to shop around for a good deal is to use an online comparison site.
Here are some of the sites you might want to consider.
Your next step
If you don’t keep up your payments, you might lose your car.