How to fund your new car

If you're taking the plunge and buying a new (or used) car this September, perhaps to take advantage of the new '63' plates, you'll have two important decisions to make: which car you want to buy, and how you're going to pay for it – though not necessarily in that order!

If you're unable to pay for your vehicle outright, the good news is that loan and credit card deals are the most competitive they've ever been – and you could also consider leasing. So, to help you make the right decision, here's a rundown of the best ways to fund your new set of wheels.

A personal loan

Personal loan rates have become increasingly attractive in recent months, making this a relatively inexpensive option.

The market leading loan for medium-sized borrowing comes from peer-to-peer lender Zopa. It offers an annual percentage rate (APR) of 4.8% on loans of between £7,500 and £15,000 to be repaid over one to three years. If you'd prefer to repay your loan over one to five years, you'll pay a slightly higher APR of 4.9%, also with Zopa.

Alternatively, Sainsbury's Bank offers an APR of 4.9% on loans between £7,500 and £15,000 to be repaid over one to three years and Derbyshire Building Society offers an APR of 5.0% on loans of the same size to be repaid over one to five years.

Should you need to borrow more than £15,000, Sainsbury's Bank also offers an APR of 7.0% on borrowing between £15,001 and £25,000 to be paid back over one to five years.

A credit card

A 0% purchase credit card is another cheap way to borrow as interest-free deals have lengthened considerably over recent months.

For example, the Tesco Clubcard credit card for purchases now offers 18 months 0% on spending, which means you won't pay any interest on your purchase debt for a year and a half.

However, you won't be able to apply for this card if you already have a Tesco credit card, so alternatives include the Halifax purchase credit card, which offers 0% on spending for 17 months, or the Fluid
Purchase credit card
, which offers interest-free spending for 16 months.

The Tesco and Fluid cards have a representative annual percentage rate (APR) of 16.9% (variable), while the Halifax card has a representative APR of 17.9% (variable). These kick in as soon as the 0% window ends, so be sure to clear your balance before then. Also be aware that you'll only qualify for these deals if you have an excellent credit rating.

Your credit score will also dictate how large your credit limit will be so bear in mind it might not be sufficient to pay for your car in full.

However, an advantage of paying for your car with a credit card is that your purchase will be protected under Section 75 of the Consumer Credit Act and the Consumer Credit Directive, which means your credit card provider is jointly liable with the merchant for purchases between £100 and £60,260 that turn out to be faulty, damaged or simply don't arrive.

This even applies if you have only put a deposit on your credit card and pay for the remainder of your purchase by cash or debit card, so long as the total value of your purchase comes to more than £100.

Dealer finance

Car dealerships often offer their own finance deals, some of which are interest-free, though be aware they may not be available on the particular car model you're after. However, while they can be tempting, be sure to read the small print carefully because they often require you to pay a hefty deposit upfront.

For example, with Vauxhall's 'Flexible Finance' deal, you could pick up a new Astra Energy 1.4 for £179 a month to be repaid over 60 months. The offer comes with a representative APR of 0% and Vauxhall will also give you £2,000 towards the deposit, but you'll still have to find a further £5,065 to pay upfront.

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Similarly, with Honda you could get your hands on a new Civic 1.8 for £331 a month to be repaid over 36 months, but you'll have to put down £6,433 as a deposit.

As well as being able to afford the initial deposit, you should also ensure you can keep up with your repayments. If you can't, you could lose both the car and the money you've handed over so far.

Personal leasing

Personal leasing usually requires a smaller deposit than many finance agreements ask for – typically two to three months' worth of payments - and also gives you the opportunity to upgrade to a new model every few years. However, leasing means you never actually own the car, unless you exercise an option to buy it at the end of the agreement.

At the start of the contract, you'll agree how long you will lease the car for, how many miles you will drive each year and how much you'll pay each month for the lease. Bear in mind that, while you can usually choose from a range of manufacturers and models, if you choose a more expensive model, you will pay more each month.

In addition, if you go over your mileage limit, you will be charged, and you'll also pay a fee if you choose to get out of your deal early.

Your savings

Of course, if you can afford to pay for your new car upfront with your savings, you won't have to worry about borrowing money. But only do this if you're entirely confident you can afford to - it's still important to have a nest egg to fall back on in the event of an emergency. This should work out to be at least three times your monthly salary – ideally six times, to be on the safe side.

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