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Buying a car? A simple guide to financing your purchase

Buying a car? A simple guide to financing your purchase

For some people buying a new car is an exciting time, but for others it can seem a bit of a chore. There is so much choice these days - not just with what car to choose but with finance options too! 

We can’t tell you what car to buy, but we can explain the pros and cons of car finance to help you decide the best option.

The best way to buy a car is usually to fund it with cash as you won’t be paying any interest and you will own the car outright.  However, this is not always possible and you may want to keep your savings back for other things or emergencies.

Check out our run-down on car financing options below:

A personal loan:

You could get a personal loan from your bank or another loan provider.  Typical interest rates are between 2.9% and 6.8% APR (based on £25,000 over 5 years, assuming a good credit rating).

Pros:

- If you have a good credit rating you can get a low interest rate and choose your term

- Having the money in a lump sum can give you better bargaining power when buying a new or used car

- You have more flexibility as you can sell the car when you need to and pay back the loan

- You can shop around for the best interest rate

- Can be arranged on the phone, internet or face-to-face

Cons:

- You would have to make the term of the loan longer to reduce the monthly payments and they still may not be as low as what you could achieve with PCP or Lease Hire

- Other borrowing might be affected

- You might have to wait for the funds to appear

 

Hire Purchase:

A Hire Purchase is similar to a standard loan but with a key difference, as the name suggests you hire the car over the period of the contract with the option to purchase it at the end. 

Pros:

Allows you to spread the cost so you can afford to get a higher value car

Simple to arrange

Flexible - terms from 1-5 years

You own the car after all payments are made

You can sometimes get a deposit contribution from the manufacturer

You can also sometimes get 0% finance - normally if you have a large deposit

Cons:

The monthly payments tend to be higher than Personal Contract Purchase and Lease Hire

You don’t own the car until final payment is made

The rates tend to be higher than standard car loans

You can’t sell or modify the car without permission from the finance company

If you fail to pay - the finance company will take the car away!

 

Personal Contract Purchase:

A more flexible deal where the monthly payments are lower.  You typically pay 4-7% APR in interest on these types of deals with an optional balloon payment at the end if you want to own the car.

Pros:

    - Lower monthly payments so you can afford a better car - a deposit is typically 10% of  the price of the car

   - The lender guarantees the car will be worth a minimum sum at the end of the deal

   - One of the more flexible choices as you get several options at the end of the deal

   - Dealers often throw in service, maintenance packs and warranties etc which could save you money in the long run

Cons:

- You don’t own the car during the contract period

- If the predicted minimum value is very close to actual value of the car at the end of the contract you may have nothing to use on your next carl

- You must raise a large sum (the balloon payment) if you want to keep the car

- There are charges for going over estimated mileage and any damages

 

Lease Hire:

This is essentially renting a car.  You pay a very low upfront deposit and low monthly repayments and you give the car back at the end of the contract.  This type of deal is good for people who want an expensive car they wouldn’t be able to afford to buy with other means.

Pros:

- Lowest upfront and monthly cost for a brand-new car

- Cover from the manufacturer’s warranty

- Road tax and breakdown cover included

- Simple - you pay and then hand the car back to the finance company when your done

Cons:

- You don’t ever own the car

- You don’t have any equity in the car when it is sold – if the car has low mileage you will not benefit from this

- There are charges for going over estimated mileage and any damage

- Sometimes lease hire is only available to businesses

There are a couple of other options for purchasing a car that we haven’t covered in the above.  You could use an interest free credit card to fund your car purchase and keep moving the balance to avoid paying interest.  This only works if you can get credit for the amount you need to buy the car and if you are organised enough to keep moving the balance at the end of the interest free term. There is usually a fee for each time you do a balance transfer.

Another option is car swaps!  Gumtree and other websites are facilitating people swapping cars to take the hassle out of selling.

Setting financial priorities for your life stage

Setting financial priorities for your life stage