Here we take a look at the different financing options available to you whether you’re buying new or second hand.
Use your savings
The accepted wisdom when it comes to car buying is that it’s always best to pay cash, usually on the assumption that the dealer will offer you a discount for doing so.
While this may be true in some cases – usually once the salesperson has ‘had a word with the manager’ - it’s often better to pay with cash just to avoid the interest fees associated with loans, hire purchase or a credit card payment.
This is because the level of interest you pay when you take on credit will exceed any return that you would make on even a market leading savings account.
Take out a personal loan
If you are not able to pay in cash then you may be offered a finance deal by the garage you are buying the vehicle from, but you may actually be better off taking out a personal loan as interest rates are currently very competitive, particularly on loans of over £7,500.
Even if you are looking to borrow less it’s worth comparing lenders to see if you can find a better deal than that offered by the garage.
Put it on plastic
This could be a good option if you are looking to buy second-hand, or even if you have your eye on a new car at the cheaper end of the market, as the best purchase credit cards will offer long payment periods at 0% interest.
This means that, provided you have paid the balance off in full by the end of the promotional period, you’ll pay nothing in interest.
Agree to a hire purchase (HP) deal
Hire purchase (HP) requires you to put down a deposit up front and then commit to pay a set amount of monthly instalments while you use the car. Once all the instalments have been paid, the car is yours.
This type of loan is secured against the car, which means it may be repossessed if you fall behind on your payments. Also, because you do not own the car until the final payment is made, you will not be able to sell it while you still owe money on it.
Make sure you read the fine print on any HP agreement as, in addition to your deposit, you may be required to make a large ‘balloon payment’ at the end of the finance term before you own the car outright.
If you buy a car on hire purchase and want to end the arrangement early, you will be entitled to a rebate of charges based upon the payments you have made and how long is left to run on the contract.
Lease a vehicle
Leasing is basically a long-term rental agreement where you pay a monthly fee to use a car for an agreed period and number of miles.
This is becoming a popular way of running a vehicle as it enables people to drive a brand new car which they can then update at regular intervals, depending upon the duration of the lease.
There are two main leasing options available, Personal Contract Hire and Personal Contract Purchase.
Personal Contract Hire (PCH)
This is a good option if you want to run a new car every few years, possibly a better one than you would normally be able to afford, but do not want the commitment of having to buy it at the end of the arrangement.
The monthly instalments are based upon the expected depreciation of the vehicle - the difference between the car’s value when new and its value at the end of the PCH agreement. Choosing a car that holds its value could therefore mean your monthly instalments are lower.
PCH usually requires a smaller deposit than other finance arrangements and, because monthly payments are fixed and can include a maintenance package as well as road tax, this could be a good option if you are on a tight or fixed budget.
However, with this type of arrangement you never actually own the vehicle outright - it is handed back to the leasing company at the end of the arrangement. And if you exceed the agreed mileage limit then you’ll probably see a significant rise in your monthly instalments.
Personal Contract Purchase (PCP)
If you do not like the idea of paying for and running a car that you will never own, then PCP gives you the opportunity to buy the vehicle at the end of the leasing agreement.
PCP requires you to pay a deposit followed by a series of monthly instalments and a final ‘balloon payment’ that is based upon the car’s value at the end of the lease. If you do not want to keep the car you can either part-exchange it for another vehicle or simply hand it back to the leasing company.
And because you are given a minimum guaranteed future value for the car, this means your car can never be worth less than any outstanding payments, so you cannot fall into negative equity.
When agreeing to lease a vehicle you need to make sure that any agreed mileage limitations are realistic as exceeding these limits could see you paying a hefty penalty fee at the end of the lease agreement.
You could also be subject to a penalty fee if you decide to end the lease agreement early. The leasing company can actually ask for the full amount of the contract back.
Guaranteed asset protection (gap) insurance
One final thing to consider is taking out additional insurance that covers you if the car is stolen or written off. This is known as guaranteed asset protection (gap) insurance and could be necessary because insurers only pay out on the current market value of a vehicle. This will be lower than the retail price and means the pay-out you receive might not cover the outstanding repayments you owe.
There are different types of gap insurance such as finance gap, which pays out the difference between any insurance settlement and the remaining finance, and invoice gap, which pays out the difference between any settlement figure and the original amount paid for the vehicle.
You may also be able to take out vehicle replacement insurance, which covers the cost of a new replacement vehicle even if it has increased in price.
Like all insurance and financial products it makes sense to shop around to find the best priced deal that is right for your circumstances, and you can use MoneySupermarket to get an instance quote on gap insurance.
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.