Taking out a car loan for a new car image

Taking out a car loan for a new car

Few of us have the spare cash lying around to buy a new car outright.

But whether you want a brand new car or a second-hand one, choosing the best way to finance it could save you hundreds of pounds.

Here, we look at the various finance options available and explain the pros and cons of each.

Hire Purchase plans

Car manufacturers and dealerships often offer great finance deals on new vehicles, with many charging low interest rates on hire purchase plans that require an upfront deposit and a set of monthly instalments.

Once all the instalments have been paid, the car - which you can drive from the start of the agreement - is yours.

In the meantime, however, it could be repossessed at any point if you fall behind on your payments, meaning you lose not only the car but also any cash handed over at that point.

It is also worth noting include that you will not be able to sell the car until you have paid the final installment (which may be larger than the others) and that ending the agreement early is likely to result in a penalty.

Personal loans

Unlike hire purchase agreements, you can sell a car to pay off a personal loan should you become unable to keep up with the repayments.

If you are at all worried about being able to afford the monthly repayments, a low-rate loan may therefore prove a more sensible choice.

The best personal loans on the market at the moment come with interest rates as low as 5%.

Deals of this calibre are restricted to borrowers with unblemished credit files, though.

And the personal loans available to borrowers with less-than-perfect credit scores are likely to prove much more expensive.

If you are interested in a loan, please check out the MoneySupermarket loans comparison tool.

Leasing agreements

Leasing agreements are basically long-term rental contracts with which you pay a monthly fee to use a car for an agreed period and number of miles.

They are popular with those keen to drive a brand new car without paying for it upfront, and come in two main forms: Personal Contract Hire (PCH) and Personal Contract Purchase (PCP).

With PCH, you can have a new car every few years without having to buy it at the end of the arrangement.

If you are at all worried about being able to afford the monthly repayments, a low-rate loan may therefore prove a more sensible choice.

However, if you do not like the idea of paying for and running a car that you will never own, then PCP - with which you buy the vehicle at the end of the leasing agreement - will probably prove more suitable.

Either way, remember to check the terms and conditions carefully for penalties and extra charges, and consider guaranteed asset protection insurance that covers you should the car be stolen or written off and your general insurer refuse to pay out more than the current market value.

0% credit cards

For cheaper second-hand car purchases, a credit card offering 0% for an introductory period could prove the smartest choice.

If you have a good credit score, for example, the Tesco Clubcard Credit Card for Purchases is currently offering new customers 16 months of interest-free credit that could easily be used to purchase a car.

The obvious advantage of borrowing the money this way is that you will pay no interest at all if you can manage to repay the full amount within the interest-free period.

However, you will need to be disciplined enough to avoid incurring high interest rates at the end of the 0% period.

The representative APR on the Tesco card, for example, is 18.9% (variable).

It is also worth noting that these deals - like the cheapest personal loans - are limited to people with good credit scores.

Moneysupermarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.

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