For some tips on finding the right new or second-hand car for you, read our article ‘Top tips if you’re buying a car’.
So what finance options are available if you’re buying a car?
A hire purchase (HP) agreement
For many people, this is a simple way to buy a car and spread the cost. An HP agreement is different to a normal loan because you don’t actually own the vehicle until it’s repaid.
You’ll pay a deposit and then regular monthly sums.
Unlike a standard personal loan, if you fail to keep up the repayments, the lender can ask for the car back. You’re not allowed to sell it until you’ve repaid the full amount.
You can often arrange to reduce the amount you pay back each month by agreeing to give the lender a ‘balloon’ payment at the end of the contract – a final lump sum.
Most of the big car manufacturers have their own HP deals available through their dealerships. The cost varies and some dealers will offer pretty good deals to entice buyers. The monthly payment depends on the size of your deposit and the value of the car.
Watch out if your seller is offering you a 0% deal – could you buy the car for less elsewhere?
You may be offered a car loan through your dealer or garage, but it’s worth looking into the wider personal loans market.
Make sure you’re clear on what the cost will be over the lifetime of the loan and how flexible it is if you want to end the loan early.
Take, for example, a car worth £15,535. A dealer might ask for a deposit of £3,500 and charge you 11.9% to spread the remainder over three years. In total, you’d have repaid £17,742.56.
However, if you were able to qualify for an Alliance & Leicester Personal Loan at 8.8%, there would be no upfront deposit and over the three years, you’d pay £17,645.
That’s almost £100 cheaper and means you don’t need to put down a large sum upfront.
Having said that, if you did have a £3,500 deposit ready, you’d only need to borrow £12,035, meaning you may qualify for a rate as low as 7.9% from Alliance and Leicester – further reducing the cost of your borrowing.
Perhaps you’re going for a cheaper car over a longer period. The credit will cost more the longer the term of the loan, but it may become more affordable month by month.
If you wanted to borrow £10,000 over five years, Sainsbury’s Finance is offering Nectar cardholders a typical annual percentage rate (APR) of just 7.9%. Borrowers would repay £200.99 a month, repaying £12,059 in total.
Not everyone is going to qualify for such a low rate, of course. A loan from Creditplus Car Finance has a typical APR of 17.9%, meaning you’d repay £246.27 a month, paying £14,776 over the lifetime of the loan. Compare car hire loans as well as more general loan options.
Bear in mind that many banks are currently rewarding loyalty by only offering existing customers credit, it’s also worth asking your bank for its rates.
Be careful, though, having a number of providers check your credit score at the same time can actually damage your rating. Consider which deals you are likely to qualify for and don’t apply for three sets of credit just to see which offers you the best deal.
Leasing a car
A growing number of people aren’t fussed about owning their car, they just want to drive a new model and swap it occasionally for an even newer one.
For many people, this genuinely is a great option. You don’t need to come up with a deposit at the start of the contract and the monthly payments can be lower than on a loan or HP agreement.
At the end of the leasing period, you can change or upgrade your car, so you’re always driving something new.
Some car lease payments include servicing the car too, so your costs really are simplified.
But there are downsides. You don’t own the car, so your money isn’t buying an asset and there’s nothing to sell at the end of the term (although for some people that not having to find a buyer for your car when you want to change it will be a plus).
There will often be restrictions on the number of miles you can do – too many and you could face a fee because the car will be worth less. You’ll also be charged for any damage to the car beyond the normal wear and tear.
Don’t forget, you’ll need comprehensive car insurance rather than third party only, because the car isn’t yours.