BEST WAY TO FINANCE BUYING A CAR.

Buying a car is no simple decision. From buying outright to buying a car on finance, there are many options. 

You also have to consider running costs. 

In fact, it’s probably the second most expensive thing you’ll buy - after your home. So it’s important to make sure you choose the best way to buy a car for you.

The cheapest way to buy a car is to fund all or part of it in cash.

This is  because you’ll have to pay interest on any loan or finance agreement.

If you decide to use cash, remember:

• Make sure you have enough savings left over for an emergency after you have paid for your car.
• If you don’t have enough savings to buy the car in full, use what you can afford to put down the biggest deposit you can.
• Even if you use money from your savings you might be better paying for some of the car on your credit card so you benefit from credit card purchase protection – putting just £100 of the cost of the vehicle means the card company is jointly liable with the retailer if something goes wrong. You should pay the bill off in full the next month.

Buying a car using a personal loan.

If you can’t afford cash, a personal loan is usually the cheapest way to finance a car deal - but only if you have a good credit score.

You can get a personal loan from a bank, building society or finance provider if your credit rating is good. You can spread the cost over one to seven years.

Make sure the loan is not secured against your home. Otherwise you’ll be putting your home at risk if you fail to keep up with repayments.

Hire purchase (HP) to finance a new car

Hire purchase is a way of buying a car on finance, where the loan is secured against the car. You’ll need to pay a deposit of around 10%, then make fixed monthly payments over an agreed time period.

This means you don’t own it until the last payment has been made.

Hire purchase agreements are usually arranged by the car dealer, so are convenient to arrange and can be very competitive for new cars, but less so for used ones.

Personal contract purchase (PCP).

This type of car finance deal is similar to a hire purchase agreement but you usually make lower monthly payments. Keep in mind though that the total amount of money you’ll pay back is often higher.

Instead of getting a loan for the full cost of the car, you get a loan for the difference between its price brand new and the predicted value of the car at the end of the hire agreement. This is based on a forecast of annual mileage over the term of the agreement.

At the end of the term you can:

• Trade the car in and start all over again.
• Hand back the car to the dealer and pay nothing.
• Pay a final payment, also known as a balloon payment, of the resale price of the car and keep it.

Remember the balloon payment will normally range from a few thousand pounds to many thousands of pounds and will be larger than your monthly payment.

Leasing - Personal contract hire (PCH).

You pay the dealer a fixed monthly amount for the use of a car, with servicing and maintenance included, as long as the mileage doesn’t exceed a specified limit.

At the end of the agreement, you hand the car back. It never belongs to you.

Leasing (PCH) usually costs more per month than PCP. However, you’ll have greater flexibility to switch provider and the total cost can work out cheaper overall as the payment includes servicing and maintenance costs.

Using a credit card to buy a car.

Using a credit card to pay all, or part, of your car’s purchase price will give you extra protection if something goes wrong – as long as you pay at least £100 of it by card and meet your monthly card payments.

However, some dealers charge a card handling fee – sometimes as much as 3% – and some might not accept credit cards at all.

Using peer-to-peer loans to fund a new car.

Peer-to-peer loans, or social lending, allow people to borrow or lend from each other without banks or building societies being involved. You can find peer-to-peer loans on websites like Zopa.

You’ll still need a good credit score to get the best rate, and missing payments will also affect your credit rating. Interest rates will vary depending on your credit score too, so you might find peer-to-peer loans offer better interest rates than banks, but this isn’t always the case.