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Car Financing Options

Besides a mortgage, buying a new car is one of the biggest expenses we're likely to face.

Whether you're looking at buying brand new or just 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 deal to suit you.

It’s not just the purchase price that can put a dent in your finances. Don’t forget to factor in the running costs – fuel, servicing, road tax and insurance – when working out how much you can afford every month.

Cash or savings

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 your deposit or buy your car outright. Always try to keep some of your savings back in case of an emergency, though.

Another alternative to cash 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 it could get pricey.

Loans

If you have a good credit rating, you should be able to 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. Always look at the APR and the total amount repayable to ensure you get the best deal.

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 help you improve your credit score.

Hire purchase (HP)

This is probably the simplest form of car finance. You pay a low deposit (usually 10%), then pay the remaining amount over one to five years. Hire purchase deals are arranged by the dealership and can offer very competitive rates for new cars – although they might not be quite as good if you’re buying second hand. The loan is secured against your car, which means it can be repossessed until you make the final payment.

Bear in mind that you will pay more interest the longer you choose to spread the repayments. However you may be expected to pay a higher interest rate on shorter terms. Looking at the total amount repayable as well as your monthly payments will help you see which is best for you. 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 – make sure you ask before signing the paperwork.

Personal Contract Plan (PCP)

This is a low-cost version of hire purchase, where, rather than buy the car outright, you only pay the difference between the sale price and it’s trade in value to the dealer – usually after 12, 24 or 36 months. At the end of your agreed term, you can choose to hand the car back and pay nothing more, trade in your car against a new one and repeat the process, or pay the remaining amount and keep it.

Just remember that although the monthly payments may be lower than regular hire purchase, the total amount you pay if you decide to keep the car may be higher. Also pay close attention to the agreed annual mileage – exceeding the agreed limit and the condition of the car will all affect how much you have to pay.

Personal leasing

The last option is to not to buy your car at all. With personal leasing you simply pay a fixed amount every month to hire your car, usually within an agreed mileage limit. 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.

Always check to see what’s included in your leasing agreement – higher monthly payments might be acceptable if your servicing is included, less so if not. You’ll also have to find a sizeable deposit, typically three months’ rental. Finally, pay close attention to the agreed monthly mileage – you could be stung by penalty charges if you exceed your limit.


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