Whether you want to buy a brand new motor or a banger, coming up with the cash all at once is often impossible. So if you need to rely on credit to buy your new wheels, what’s the best way to borrow?
Here, we look at your financing options and the pros and cons of each. If you’re browsing second hand cars then don’t forget to check out our article 'Top tips if you're buying a car’.
A personal loan
Don’t assume that your garage or dealer has the best finance deal for you. Personal loan rates for borrowing £7,500 at the major banks are the lowest they’ve been since November 2008.
That means that a car hire loan from a bank could be one of the cheapest options. A major perk of using a personal loan is that you own the car you buy and can sell it if you want to.
Best rates are available on borrowing of between £7,500 and £14,999, but even if your car costs less than that, compare lenders to see if you can find a better deal than the one offered by your garage.
If you want to borrow £7,500 over five years, both Sainsbury’s Finance and Alliance & Leicester offer a market-leading headline annual percentage rate (APR) of 7.2% - although be aware that the A&L deal is not available direct from the bank.
At that rate, you’d pay £148.41 a month, meaning a total charge for credit of £1,405 over the full term of the loan.
If you wanted to borrow that amount over just three years, Sainsbury's offers a market-leading representative APR of just 7.1%. You'll need to have a Nectar card in order to qualify for the best rates from the supermarket, but they can be easily collected in store.
Put it on a credit card
If you’re buying a cheaper, second-hand car then you could potentially use a credit card and pay even less for your borrowing.
The best purchase credit cards offer new customers lengthy 0% periods on their new purchases and, if you are able to clear the debt in that time, you can avoid paying a penny in interest.
For example, the Tesco Clubcard Credit Card offers a market-leading 13 months at 0% on your spending, as well as nine months at 0% on balance transfers, for a 2.9% fee.
The representative APR is 16.9% variable, so if you can’t pay off your car within that interest-free window then you may be better off with a loan instead.
A hire purchase (HP) agreement
With an HP agreement, you buy the vehicle over a set period and make monthly payments towards it.
This kind of credit agreement is often offered on new cars through dealerships and many of the big name car manufacturers provide very competitive rates.
You’ll need to pay a deposit, often of as much as 10-15%, and then make monthly payments. You may find you can reduce these monthly payments by agreeing to pay a final lump sum as well.
However, this type of scheme is different to a personal loan because you don’t own the car until you’ve fully repaid the lender, meaning you can’t sell your vehicle while you still owe money.
Be very aware that the finance company can take the car back if you don’t keep up repayments. You could then be held liable for any damage caused while you’ve been driving it.
If you do go with this option, it may be worth considering guaranteed asset protection (Gap) insurance. This covers you if the car is written off or stolen and your insurance doesn’t meet the full outstanding balance.
Lease a car
This is an increasingly popular option because it lets people drive a new car and then upgrade to a newer one at a later date.
With a lease, you never actually own the car. As the name suggests, you lease it for a fixed period. At the end of that time, you simply hand the car back and can begin leasing again.
Some car lease agreements include servicing costs, which can really simplify your motoring bills. Also, monthly payments are often cheaper than with a hire purchase agreement or loan.
Of course, the downside is that you never actually own the car; your payments aren’t gradually buying the vehicle.
There are often restrictions on the number of miles you can drive too, as a high number could devalue the car. If you cause any damage beyond normal wear and tear, you’ll usually have to pay to repair it.
A personal contract purchase (PCP) plan
This is a sort of half-way house between an HP agreement and a car lease. With a PCP, you lease the car for a fixed period, pay a deposit and then make monthly payments.
However, at the end of the agreement, you have a choice. You can choose to purchase the car for a final lump sum, or simply hand it back to the contract provider. If you hand it back, you won’t get your deposit or any of your payments returned.
As with a lease, if you choose not to purchase the car then you may be charged if you’ve exceeded your agreed mileage.
You’ll have agreed the lump sum in advance with the contract provider – it’s known as the guaranteed final value (GFV). If the car is worth more than that by the end of the contract then you can use that value as a deposit on your next PCP.
This can be a convenient and very flexible option for anyone who’s not sure if they will want to buy the car at the end of the agreement.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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