A car is likely one of the more expensive purchases you’ll make in your life.
Whether you want a brand-new vehicle or a second-hand run-around, it’s important to know the best way to finance a car purchase and the purchasing option that best suits your budget.
Beyond the vehicle's upfront cost, you'll also have to factor in running costs, repairs, and insurance when working out how much your car will cost you month to month.
There are several options available for financing your new car purchase. Which one you choose will depend on your overall budget and whether you want to own your vehicle outright, or simply lease it.
Below are the most common methods to buy a new car on finance.
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 could get a good deal on a personal 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 will, however, owe the lender for the money you have borrowed.
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, for whatever reason, 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 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
- Quick access to finances to buy the car upfront.
- You own your vehicle outright.
- You could secure a reasonable interest rate if you have a good credit rating.
- There is a wide range of loans on the markets, making it easier to find one that suits your budget.
Cons of a Personal Loan
- It might be difficult to secure a loan if you have poor credit.
- If you sell the car or it is damaged, you will still owe the loan’s full price.
- The value of your vehicle will depreciate over time, meaning you will almost certainly lose money against what you originally borrowed.
- A loan could be secured against your house, meaning you could lose your home if you fail to pay.
Hire Purchase (HP)
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 period and pay off the remainder of the car’s value over this period. You’ll owe interest too and the longer your repayment period, 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 to finance your 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 ask before signing the paperwork if there are any potential issues.
Pros of a Hire Purchase
- You’ll be able to pay a set amount per month.
- You can spread the costs up to five years.
- You can choose to purchase your car at the end of your agreement for its remaining cost.
Cons of a Hire Purchase
- You won’t own the car and won’t be able to sell it during the terms of your agreement, unless you repay the hire purchase agreement in full first.
- Your car might be repossessed if you can’t keep up with repayments.
- You may only secure an affordable hire purchase arrangement if you have a good credit history.
Personal Contract Plan (PCP)
One of the affordable ways 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.
However, unlike an HP, the amount you pay back monthly with a PCP is not just based on standard interest rates. It also factors in the depreciating value of the car.
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, 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
- More affordable than some other arrangements.
- Often includes maintenance and services from the dealership.
- You can hand the car back at the end of your arrangement it costing you any more money.
Cons of a Personal Contract Plan
- You don’t own your car outright.
- Arrangements usually include strict restrictions on mileage or how often you can use your car.
- Your car could end up being worth less than the dealership’s predicted value, leaving you out of pocket if you decide to buy the vehicle outright.
- You’ll be charged for any damage the car incurs during your lease.
Personal Leasing (PCH)
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. The deposit can also be as much as six times the monthly payments.
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.
It’s worth noting that most PCH agreements include limits on how often you can use the car and when.
Pros of a Personal Leasing (PCH)
- Maintenance and repairs are usually included by the dealership.
- There is no expensive payment waiting at the end of your agreement to buy the car outright.
- You don’t have to worry about the car’s depreciating value.
Cons of a Personal Leasing (PCH)
- Some PCH agreements are aimed at businesses and don’t include VAT (20%) in the advertised price. Make sure you know the full details of your deal before agreeing to anything.
- There are limits on when and how often you can use the car.
- There’s no option to buy the car outright.
- The initial deposit can be higher than other, similar car finance options.
Cash or savings
The final method of financing your new car can be the most cost effective and usually the most financially secure as you have no interest or charges to pay on the cash amount. If you have the money available, you could always 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.
However, even second-hand cars can be expensive, and it can be unachievable for most people to find the money to cover the cost of a car upfront.
With interest rates at an all-time low, chances are your savings won’t be earning you a great deal at the moment. So rather than take out a loan at a higher rate of interest, you could use your savings to either pay a deposit or buy your car outright. Always try to keep some of your savings back in case of an emergency, though.
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 much 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
- You own the car outright straight away.
- No monthly payments to worry about.
- No threats of repossession as you’ll own the vehicle.
Cons of cash or savings
- You’ll have to cover the costs of repairs, maintenance and damages.
- You’ll have to sell the car if you want a new one and your vehicle will likely be worth less than when you bought it.
- The initial costs can be huge and unachievable for most people.
Read our Know How blog for more on financing life’s big decisions.