What Are My Options for Financing a Car?
For many people, buying a car is a significant purchase, second only to buying your own home. And with many different options in terms of how you can physically pay for a car, it can be difficult to figure out the best way for you to proceed.
Funding fully or partially in cash is the cheapest way to buy a car, as you won’t have to pay any interest or fees. But many people don’t feel comfortable taking such a large amount out of savings, so it can be worth looking at the other possibilities.
If you have a good credit score, an unsecured personal loan from a bank or building society is usually the cheapest way to borrow money to cover the cost of the car, though the monthly cost can be higher than other options. Use comparison sites to shop around for the most competitive APR, remembering that not all the comparison sites will give you the same options, so you’ll get the most choice if you check out more than one.
A personal loan can be arranged over the phone, internet or face-to-face, depending on which loan provider you’re dealing with, and the speed at which you’ll receive the funds will vary. The loan can usually be spread over anything from one to seven years. Choose the shortest term you can afford, while making sure the monthly repayments are manageable for you.
If you take out a personal loan to pay for the car in full, you will own the vehicle as soon as payment is made.
Hire Purchase (HP)
Hire purchase is a type of loan that is secured against the car you are buying, normally arranged by the car dealer. You pay an initial deposit (usually around 10%), then make fixed payments each month according to the term you agree with the lender, which can be anything between 12 and 60 months. You will not own the vehicle until the last payment has been made.
Interest rates for hire-purchase agreements are usually competitive, and they can be a good option if you want the speed and convenience of arranging your finance with the dealer you’re buying the car from. This kind of agreement can be arranged for both new and used vehicles.
In many cases, hire-purchase agreements are subject to administration charges. Some lenders require these fees to be paid up front, while others will add it to the value of the loan.
Personal Contract Purchase (PCP)
As with an HP agreement, with PCP your finance is usually arranged with the dealer you are purchasing the vehicle from, though the monthly payments are often lower. You pay an initial deposit of around 10%, but rather than taking out a loan for the full cost of the car, you take out a loan for the difference between its price brand new and its predicted value at the end of the agreement, based on a forecast annual mileage. At the end of the term, which is usually between 12 and 48 months, you have several options:
- Trade the car in and start again with another vehicle
- Give the car back to the dealer, with nothing more to pay
- Make a final ‘balloon’ payment (which is agreed at the start of your contract) and keep it
The most important thing to remember about a PCP deal is that you never own the vehicle, unless you pay the balance at the end of the term. If you want to return the vehicle but you have exceeded the annual mileage or it is deemed to have excessive wear and tear, you will be liable for extra fees. Generally speaking, with a PCP deal the total amount you pay might be slightly more than with hire purchase.
Leasing/Personal Contract Hire (PCH)
With a lease or PCH deal, you pay the car dealer a fixed monthly amount for the use of a vehicle over an agreed term between 12 and 36 months. The deals are often offered with servicing and maintenance included. You agree not to exceed a specified mileage limit and you usually have to pay a deposit of three months’ rental.
When the agreement comes to an end, you hand the car back to the dealer. It never belongs to you. As with a PCP agreement, excess mileage or damage to the vehicle may be chargeable.
Leasing can be a good option if you like the idea of all services and maintenance being covered and paid for, and you don’t want to worry about the vehicle depreciating in value.
However, keep in mind that the monthly payments are subject to VAT, and that you are entering into a contract that can be costly if you need to terminate early.
If you pay for your car in part or in full by credit card, you will have the protection of Section 75 laws if something goes wrong. You actually only need to pay as little as £100 of the value on a credit card to receive this protection.
Bear in mind, though, that some dealers will charge a card-handling fee, which can be as much as 3% of the total value of the vehicle. Some smaller dealers may not accept credit cards at all.
And of course, if you’re not paying off the balance in full when you receive your next statement you will start paying interest on the remaining amount. This interest will usually be higher on a credit card than an HP, PCP or PCH deal. An alternative is to open a credit card offering 0% on purchases, and if you pay back the borrowing in the specified time frame it won’t cost you anything.
What’s the Best Way for Me?
The best way to decide on the right route for you is to thoroughly weigh up all your options. If you have savings, are you comfortable with the amount that will be left after you buy your car? Do you have good enough credit for a personal loan? If so, that could be the cheapest way of borrowing. If you need to look at one of the alternative methods, compare the total cost of borrowing, including all charges, over the full term of the loan, and consider whether the monthly repayments are affordable for you.