Not everyone has a pot of money stashed away to buy a car outright. This is why many choose to breakdown the price into bite-sized monthly instalments. But with many different finance schemes available which one works best?
Below we explain the different ways you can finance your vehicle, including some of the options you’ll likely encounter at the dealership.
However, like the different types of mortgages, there are different ways to finance your car. Some of these options offer lower monthly repayments, but you don’t own the car outright at the end of the term, while others provide you with full ownership.
These are discussed in more detail below.
Like borrowing money to pay for home renovations, you can use a personal loan to buy a car. These can be accessed through banks, building societies, and other traditional lenders, with your rate largely dependent on your credit score.
In addition, you will also need to decide if you have the assets to opt for a secured or unsecured loan. For example, putting up your home as collateral in a secured loan can get you a better rate but it does mean that if you fail to keep up with your monthly repayments then it could be repossessed.
To find the best loans for you, visit our preferred broker Loans Warehouse.
One of the key advantages of using a personal loan is its flexibility. You don’t necessarily need to cough up a deposit for your purchase (although doing so will reduce your overall borrowing costs) and you will own the vehicle outright. This means you have the right to sell it if you wish to reorganise your finances.
Before deciding on a personal loan, you’ll need to consider if your credit will be secured or unsecured. Read our guide What is the difference between secured and unsecured loans?
Under a Hire Purchase (HP) plan your loan is secured against the car. This means you never own the vehicle until the final instalment, and if you fail to keep up to date with these repayments then your car can be repossessed. According to Citizens Advice, your lender will need a court order to repossess your vehicle if you’ve repaid a third or more of the total amount owed.
It is also worth remembering that because you don’t own the car you can’t sell it, and if you do it will be considered a criminal offence. Instead, Citizens Advice says you can exit the agreement at any time and return the vehicle to your lender.
To begin this process, you need to make sure your instalments are paid up until the date your agreement ended. Your lender is entitled to half of the amount borrowed, so if your instalments amount to less than this figure you could be asked to repay more. Alternatively, if you’ve repaid more than half the amount owed then you can’t receive a partial refund but won’t have to pay anything further.
The key part of leasing a car is that you never own the vehicle, much in the same way that you never own your home if it’s on a lease.
Instead, when your instalment plan ends, you are required to hand the vehicle back to the leasing company. Then the vehicle is checked for damages, exceeded mileage or any other problems for which you will need to foot the bill.
After this you can take out a lease on a new, more modern vehicle and start the process again.
It is a form of financing which is suited for those who wish to drive a new car every few years. Cars are naturally depreciating assets, meaning they lose value over time. So, owning the vehicle means you will need to consider how its value in the future affects its sell-on price.
Crucially though, the monthly instalments on a lease tend to be cheaper than other financing options, such as a HP plan.
Sometimes you can reduce your monthly repayments further by agreeing to a lower set mileage. Exceed this mileage, and you will be faced with extra fees.
Think of a Personal Contract Purchase (PCP) as a mixture of both a HP and leasing plan. You will initially start by making a deposit on the car and a set number of fixed instalments. These repayments are based on how much your lender expects the vehicle to depreciate over time, which is why your expected mileage can play a crucial role in determining your monthly instalments.
Once you’ve finished paying off these monthly repayments, you’ll have the choice to buy the car outright or walk away.
If you decide to own the car, then you’ll make what is known as a “balloon payment” where you’ll pay what the dealer thinks the car is worth. Given that this can be quite large, you might need to take out a personal loan to cover the cost.
While it is possible to buy your car on a credit card, not all dealerships accept this form of payment. You’ll also need to remember that credit cards typically charge a higher rate of interest than other forms of financing unless you opt for a card with an interest free introductory period. If you do so, keep an eye on when this introductory period expires and make sure you repay the full cost within this period, as you could then be left with hefty credit card debt.
In instances where using a credit card does make sense, buyers have the added protection of Section 75 of the Consumer Credit Act. Under this law, all purchases between £100 and £30,000 are protected by your credit provider. In other words, if your car is faulty upon purchase your credit provider will legally be required to cover its full cost.
Whether it be to own the vehicle outright or just reduce your monthly expenditure, you could be allowed to pay off your car early. To start investigating this option, find and read your financing agreement.
When doing so, make sure to look out for possible early repayment penalties. These are important, because if you’re nearing the end of your agreement paying off your car early could be the more expensive option once these charges have been added.
Otherwise, if you’re set on paying off your car to reduce your debt, there could be more effective options instead. Read our guide on managing debt to find out more.
Before applying for any form of borrowing, make sure to check your credit score. If it needs some work then you could find yourself considering high-interest rate lending options. You can check your score by through our preferred credit brokers TotallyMoney for free.
To evaluate the true cost of your best car financing deal make sure to compare the best rates (APR) on offer.
If you think the cost of financing your car is too expensive, consider increasing the deposit on the vehicle. This will reduce the amount of borrowing, and therefore your monthly repayments.
Another option to reduce your monthly repayments is to spread them over a longer period. However, remember that increasing your number of fixed repayments will increase the overall cost of borrowing.