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The best way to finance a new car

Whether you’re looking at buying brand new or want a second-hand run-around, buying a car is a big decision. It’s important to understand what your options are, so you can find the best car loan deal to suit you.

A car will be among the most important things you'll ever buy – not to mention, potentially one of the most expensive.

Whether you choose new or used, buying a car is a big decision that will affect your finances for years to come.

If you need help financing for a car, there are a range of options available to you. But be sure to remember, as with any loan, you’re still liable for taking on the debt and should be sure you can comfortably afford to make repayments.

What you’ll learn –

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Car Loans

Looking to upgrade your car to something a little bigger, or are you looking for something more economical? Spread the cost with a car loan from Norton Finance.


Can I buy a car with a loan?

Yes, you can buy a car with a loan. If you aren't in a position to pay cash for your car, it is still possible for you to raise the funds by getting a loan for your car.

There are various options available when it comes to car loans in the UK, but you should keep in mind the size of this financial commitment. You should only borrow what you can afford to repay – including any interest charges added to your repayments.

First, you need to understand the different finance options available to you. Then, it’s time to decide which option best suits your personal financial situation.

Car financing options

There are two main ways of raising funds to buy a car. The first is taking out specific car loan finance, and the second is taking out a personal loan – which could include a credit card loan.

Personal loan

You might choose to finance your car purchase with a personal car loan. This is money borrowed from a lender, such as a bank or loan company. You can use the borrowed money to buy the car up front, though you’ll then have to pay back the lender at your agreed rate.

How does it work?

If you have a good credit rating, you should be able to get a good deal on a car loan. You can arrange for a loan over the phone, online or face to face at your bank or building society – they will usually offer more competitive rates than a dealership. You can then use the loan to purchase your car outright, making you the owner of the vehicle.

You should always look at the total amount you’ll owe the lender, including interest, and how long you can expect to make repayments, to ensure you get a deal you can afford.

If you have experienced trouble getting credit in the past, due to bad credit, you could be better off getting a homeowner loan. This is secured against your property, so you could get a better interest rate, but your home may be repossessed if you miss any repayments. On the other hand, if you budget carefully and don’t miss any payments, it could actually improve your credit score.

Unsecured loans aren’t secured to your home. But they usually come with higher interest rates and shorter repayment periods.

Pros of a Personal Loan

Cons of a Personal Loan

Hire purchase (HP)

Couple buying a car

Hire Purchase (HP) is one of the most popular ways to buy a new car. You pay a deposit on the vehicle (usually 10% of its total value) and then pay off the rest in monthly instalments over one-to-five years.

How does it work?

You typically enter a hire purchase agreement with a car dealership. You can agree a repayment term and pay off the remainder of the car’s value over this period. You’ll owe interest too and the longer your repayment term, the higher the interest.

The loan is secured against your car, which means it will be repossessed if you fail to meet your repayments. Most importantly, you won't own the car until the end of your agreement. This is when you'll have the choice to pay a final 'transfer fee' to own the car outright or return it to the dealership.

Look at the total amount repayable, as your monthly payments will help you see whether this is the best way of financing for a new car. Sometimes the dealer may allow you to return the car and not make any further payments once you’ve paid off half the cost of your car. This may affect your credit rating, so make sure you understand the terms and conditions before signing the paperwork.

Pros of a Hire Purchase

Cons of a Hire Purchase

Personal Contract Plan (PCP)

An affordable way to finance your car is with a Personal Contract Plan (PCP). These work like a low-cost version of a hire purchase. As with a hire purchase, you’ll put down 10% of the car’s value and then pay a monthly amount to lease the car for up to five years.

How does it work?

As with a hire purchase, you’ll pay a monthly amount to lease your car under a PCP agreement. This includes the option to buy the car with an additional payment at the end of your agreement.

However, in this arrangement, the dealer will base the loan on what they think the car will be worth at the end of your agreement. The amount you pay monthly covers the gap between your 10% deposit and the car's predicted future value.

So, let’s say the car's original value was £30,000, but the predicted value after five years was £15,000. You would then only be liable to pay the £12,000 owed difference between the 10% deposit (£3,000) and its predicted value, as well as any additional interest.

You’ll then have the choice of handing your car back or buying it outright for any remaining amount owed.

Pros of a Personal Contract Plan

Cons of a Personal Contract Plan

Personal Leasing (PCH)

Family looking at a car in dealership

Another way to buy a new car is through a Personal Contract Hire or car lease. As with other dealership contracts, you’ll pay an initial deposit on your new car and then follow up with monthly payments to rent the vehicle.

However, the difference with a PCH agreement is that there is no option to buy the car at the end.

How does it work?

You can choose flexible terms from 12-to-36 months, and often you’ll find that servicing and maintenance are included. You’ll also be protected against your car depreciating in value.

Pros of a Personal Leasing (PCH)

Cons of a Personal Leasing (PCH)

Cash or savings

If you have the money available, you could buy the car outright with your own cash savings. This gives you immediate access to the car and no monthly payments to worry about – you'll also own your new vehicle from the off.

Another cash alternative is using a 0% credit card. If your seller accepts credit card payments and you can get a big enough credit limit, you could enjoy an interest-free loan for as long as 20 months. You’ll also get the added reassurance of credit card purchase protection – which could be useful if you’re buying second hand from a dealership. Just make sure you pay off the full amount within the 0% period, or repayments could become very expensive.

Pros of cash or savings

Cons of cash or savings

Car finance vs personal loan

Now you know the different car financing options, have a final glance through this summary of the pros and cons to help you make the right decision.

Pros of car finance

Cons of car finance

Pros of personal loans

Cons of personal loans


Can I get finance on a motorbike?

Yes, there are motorcycle finance options. The length of the agreement depends on the type of finance, the type of motorcycle and how much you can afford to pay back monthly.

Can you get rejected for car finance?

Yes, in certain instances you may be rejected if your credit score is bad. Accrued debts, missed and late payments on mortgages, credit card or other such financial commitments can contribute to bad credit when it comes to getting car loans.

What can you do if payments on financing for a car are too high?

There are a few options if this becomes the case. These include refinancing, replacing and enquiring about a payment relief.

Read our Know How blog for more on financing life’s big decisions.


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