Funding a new car? Loan vs hire purchase

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In the market for a new motor? Then you’ll want to find the cheapest possible way to pay for it.

Unless you’ve enough put by in available and accessible savings, you’re going to have to borrow. And two of the main options are taking finance through the car dealership, or taking out a personal loan. So which of these is the better option?

Personal loans

When you take out a personal loan, you borrow a lump sum which you repay over a set term, plus interest. A personal loan is NOT secured against the value of the car, which means you own the vehicle from day one.

Chances of getting a personal loan

Your chances of being accepted for a personal loan depend on your credit history. If you’ve always paid your debts on time, and never had CCJs against you, and you’ve never been declared bankrupt, then your chances of getting a loan are pretty good. But if you’ve missed payments previously, or had other money problems in the past, your application could be refused. You would certainly end up paying higher interest than the headline rate advertised. Our Smart Search service means that when you compare loan deals with us, there'll be no trace left on your credit file - so you've nothing to lose by having a quick look.

How much interest will you pay?

The good news if you’re looking to borrow a lump sum in the band between £7,500 and £15,000 is that loan rates have never been lower. With a decent credit record, you can pay less than 4% for loans of this size. If you want to borrow more than an amount in this band, you’ll be charge around 7% or more. Less than £7,500 and rates edge into double figures. If you’re buying an expensive new car of more than £25,000, you’ll struggle to get an unsecured personal loan unless you put up your house (or another asset) as security..

Loan length

Most personal loans run from 12 months to 60 months. Bear in mind that, although monthly payments will be smaller the longer the repayment term you choose, overall you’ll end up paying more interest than if you opt for a shorter term.

Early repayment restrictions

You’ll usually be able to pay off your loan before the end of the term, but there may well be early settlement charges. These vary depending on how long your repayment term is and how much you’ve borrowed.

Hire purchase

Hire purchase plans are arranged through the car dealer when you buy your car. You pay a deposit and then regular monthly payments over a set term. At the end of the term, the car is yours to keep. Alternatively, once you’ve paid half the cost of the car, you may be offered the option of returning it and not making any more payments.

Chances of getting hire purchase

You’re more likely to be accepted for hire purchase than a personal loan if your credit rating isn’t great. However, you will need to put down a meaty deposit. This is usually about 10% of the value of the car, so if you’re buying a car costing £18,000, you’ll need an £1,800 deposit.

How long before you get the deal

A hire purchase agreement is usually much quicker to set up than a loan as you do it directly through the dealer. This means provided you’ve got your deposit ready to go, setting up a hire purchase plan shouldn’t take much longer than an hour or so once you’re at the dealership.

How much interest will you pay? 

Hire purchase rates are generally pretty competitive, and may even be cheaper than personal loan rates. In some case, if you can put down a large deposit, you find 0% finance deals. Always check the APR before signing up, so you know exactly how much you’ll pay over the term of the agreement.

Loan length

Most hire purchase arrangements run from 12 to 60 months. The longer the hire purchase term you go for, the more interest you’ll pay overall, although each monthly payment will be less. You can pay off your hire purchase agreement early, but the lender can charge you fees. If you don’t have more than £8,000 left to pay, then there shouldn’t be any extra fees. If you owe more than £8,000, you will pay a fee equivalent to either 1% of the debt that’s left, 0.5% of the debt if there’s less than 12 months to go on the contract, or the interest on the money that you still owe – whichever is lowest. Alternatively, if you’ve paid off more than half the cost of the car, you can stop your payments and hand the car back to the lender. You might choose to do this if you can find an equivalent car for less than the remaining payments will cost.

Loan max

The maximum you can borrow through a hire purchase agreement is the cost of the car you are buying, minus the minimum 10% deposit you must put down.

Remember…

New cars depreciate incredibly quickly in value. If you have an accident or your car is stolen a couple of years after you’ve bought it, your insurer will only pay out based on its current value. So, if you spend £10,000 on a new car this year, it may only be worth £4,000 in three years’ time. If it is written off, you’d have to find the extra £6,000 yourself if you wanted to replace your car with a new equivalent model. That means it’s worth thinking about gap insurance, which will cover the gap between the amount you paid for the car and the amount your insurance company will pay.

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