How to pay for a new car

March is traditionally a boom time for car sales as the new registrations hit the roads. This year will see the roll out of the ‘13’ number plate - which could prove to be anything but an unlucky number for car salesmen if the year-on-year growth in car sales continues.

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But, when you’re faced with an array of finance options, what’s the best way to buy?

The latest figures from the Society of Motor Manufacturers and Traders (SMMT) show that the number of new car registrations in January 2013 totalled 143,634, an increase of 11.5% on January 2012, when 126,853 new cars were sold.

This augurs well for March and it has led SMMT to revise its full year forecast and predict some significant growth in the car market throughout 2013. But that doesn’t mean the forecourts aren’t going to be desperate for your business – they’ve endured a lean couple of years, after all – so weigh up all your options before you buy, including your finance choices.

Dealership finance

You’re in the showroom… you’ve picked out your brand new car… you’ve decided upon the number of doors and cup holders and even haggled your way to a free Magic Tree air freshener... It’s all going to plan.

Then, as you’re ushered into the sales office to seal the deal, you’re hit with the dealership finance option – you’ve heard that finance isn’t a cost effective way to pay, but how can you possibly go wrong with an interest-free payment plan?

Well, there’s 0% finance, and there’s 0% finance. You can’t really go wrong if you’re being offered a 0% finance deal with absolutely no strings attached. But the bad news is that you’ll probably be offered a 0% finance deal that requires you to stump up around £5,000 as a deposit.

For instance, you can pick up a brand new, five-door Vauxhall Astra Energy 1.4 for just £179 per month, to be paid over a 60-month period as part of Vauxhall’s Flexible Finance plan. The offer comes with a representative annual percentage rate (APR) of 0% and Vauxhall will even give you £1,000 towards your deposit – provided you can pay £4,795 up front!

If you don’t have the cash lying around to cover the deposit but you do own a car already, you could offer it in part-exchange. But bear in mind that, although it takes away the hassle of selling your car privately, you won’t get as much for it in part-exchange as you would through the classifieds.

You may also be offered a price plan to spread the cost of servicing – Vauxhall are offering this for around £19.99 per month – but consider that, while regular servicing is required under the terms of the warranty, you are no longer obliged to do this through the manufacturer, and using your local garage may be a cheaper option.

Personal leasing

Personal leasing is another way to ‘buy’ new. It requires a smaller deposit than most finance agreements and gives you the option to upgrade to a new model every few years. You may also find that road tax and breakdown cover are included as part of the deal.

The major downsides are that you won’t ever actually own the car, you’re just leasing it from the manufacturer, and most deals come with annual mileage restrictions.

For example, for an up-front payment of just £1,386 and 36 monthly instalments of £231, you can get the same brand new, five-door Vauxhall Astra Energy 1.4 as above.

However, at the end of the three years you’ll have to either upgrade to a newer model and carry on with the monthly repayments or hand the car back and have nothing to show for your outlay.

This deal also restricts you to just 6,000 miles per year after which point an excess charge is applied for any additional miles covered.

For more on car leasing and hire purchase agreements, click here.

Personal loan

There has arguably never been a better time to get a personal loan as some lenders have cut their representative APR to a record low of just 5.1%, making them a good alternative to dealership finance, particularly if you don’t have a spare few grand lying around to put down as a deposit.

As is often the case, these rates are only available on ‘medium-sized’ loans of between £7,500 and £15,000, but then you’ll probably not get much change, if any, out of that if you’re looking at buying new.

Clysdesdale, Yorkshire and Sainsbury’s banks and Derbyshire Building Society are offering interest rates of 5.1% on loans of between £7,500 and £15,000 – for more on the loan deals of the century read Rachel Wait’s article, here.

However, to benefit from these record-breaking rates you will have to have an excellent credit rating. Anything less and you’ll be looking at interest rates closer to 10%, and if you’ve a poor credit score then there’s a chance that you may even be refused credit.

With a personal loan you won’t necessarily lose your car if you run into difficulty and can’t keep up with your repayments – the usual consequence of failing to keep up with repayments on dealership finance or leasing agreements. However, missing repayments on your loan will impact upon your credit score and may mean you struggle to obtain credit in the future.

Credit card

If you’re in the fortunate position to have a credit card with a limit high enough for you to whack the new wheels on the plastic, then a 0% purchase card will mean that you can dispense with the £5,000 deposit but still spread the cost of a new car without paying any interest.

However, if you’re not able to fund a new car with a credit card, you may be able to use it to pay the deposit if you opt for an interest-free dealership finance package. This means that you’ll still be able to get the car on an interest free deal and also spread the cost of the deposit and pay it back without incurring any interest.

The Tesco Clubcard credit card currently offers the longest interest-free period at 16 months, and also offers nine months at 0% interest on balance transfers, subject to a 2.9% fee. Once these offer periods are up then the representative APR leaps to 16.9% (variable).

Close behind are the M&S and Halifax Online All in One credit cards, which both offer 15 months of interest-free purchasing power after which time they jump to respective representative APRs of 16.9% and 17.9% (variable). Both cards also offer 0% on balance transfers – M&S for 12 months with a 2.9% fee and Halifax for 15 months with a 3% fee.

Other cards that offer 0% interest on purchases for 15 months are the NatWest and Royal Bank of Scotland YourPoints World MasterCards. Both cards also come with nine months interest free on balance transfers, with a low 1.5% fee, and jump to 17.9% (variable) representative APR, thereafter.

Savings

Of course, if you have saved up the money for a new car then there’s no need to get one on credit, and if you’ve found that your savings account is one of those that is no longer even fighting off inflation then it’s time to at least move your money to a better account.

A word of warning, though, if you’re thinking of using your savings to buy a brand new motor: new cars drop in value the second they’re driven off the forecourt and, after just three years, you can expect it to have depreciated by as much as 60% - meaning the £10,000 car you bought is now only worth £4,000.

And that’s provided it’s been well looked after and only covered about 30,000 miles in that time.

So think carefully before ploughing all of your hard-earned savings into a new car – in this instance, it’s worth considering buying pre-registered or even secondhand so you still have a relatively new car but can keep some cash in the bank.

Please note: Any rates or deals mentioned in this article were available at the time of writing. We’re free, independent and compare all UK loans and credit cards, as well as offering exclusive deals you can’t get anywhere else. Contact MoneySupermarket.com at Moneysupermarket House, St David’s Park, Ewloe, Flintshire, CH5 3UZ. © Moneysupermarket.com Ltd 2013.

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