Best way to finance a car

Andy Newbound

By: Andy Newbound

Buying a car is a big decision and a large financial commitment. To help you get behind the wheel, there are a number of options available. These include options that mean you’ll own the car at the end, plus those that mean you won’t.

So, to help you identify the best ways of procuring your dream car, we’ve taken a close look at the variety of different options available to you.

Use your savings

If you’re prudent enough to have savings, this can be one route to your next car. Paying for your car outright in cash could certainly help you drive a harder bargain during any negotiations over price or part-exchange values.

However, using your savings and paying cash also comes with some disadvantages. For instance, you’ll be locking a large chunk of your money away in one single asset – the car. Whether you buy new or used, the value of your car could depreciate during the months and years that you drive it. So when you come to sell it on, it’s unlikely to be worth anywhere near what you originally paid for it.

Plus, if you use the majority of your savings, this may mean that you no longer have a personal ‘rainy day’ fund to help you manage any unexpected bills that might come along.

Acquire a personal loan

If you’re interested in getting a car on finance, an alternative to paying cash is by spreading the cost over several years with a personal loan. These are usually provided by high street banks, building societies or online finance providers and could help finance the full value of your car. You’ll also own the car outright from the moment you drive it away.

To obtain a personal loan, you usually need to have a very good credit rating. It also pays to shop around, to make sure you get the best possible deal. Also, make sure you know the difference between an ‘unsecured’ personal loan and a ‘secured’ loan.

Simply put, lenders who offer a ‘secured’ loan may want to use your house as collateral. If you find you’re unable to repay the loan for any reason, the lender could take legal action to repossess your home to recover the money. An ‘unsecured’ personal loan doesn’t come with this risk, but the interest rates or lending criteria can be higher as a result.

Personal Contract Purchase

These deals have grown to become the most popular type of car finance available. Many buyers believe this is the smartest way to buy a car; the overwhelming majority of all new and used cars sold on finance in the UK are done in this way.

This option is also considered to be the most flexible, giving you the choice of owning the car or not – depending on your preferences and circumstances.

Here’s how it works:

- Using your deposit and estimated annual mileage, your dealer will work out the car’s depreciation

- This is usually much less than it costs to buy the car outright

- Additionally, depending on your credit score, it could be HP or a Loan version of PCP (this Loan version may be called a Motorloan Balloon) and the Loan version means you own the car straight away.

- At the end of your agreement, you can then pay the value of the car to own it if it is the HP version of PCP (this is often called the Guaranteed Minimum Future Value)

- Alternatively, you can hand the car back, choose another and start another PCP agreement. Some MotorLoan Balloon agreements may offer to buy the car from you as well to give you more flexibility.

- They’re so popular because they tend to offer smaller deposits, more affordable repayments and the flexibility to swap your car at the end of the agreement.

More About PCP

Personal Contract Hire

With this type of agreement, you are renting the car from the lender and there is no option to own it any point – it’s simply a long term rental.

PCH can be an attractive option for those whose budget doesn’t stretch quite as far as they’d like, because your monthly rentals are generally quite low.

Also, let’s face it, a car is an asset that very quickly depreciates in value. If you’ve funded your purchase with cash for example, then you’ll have little to show for it at the end because there’s no way you’ll get back what you paid. Unless of course you’ve invested is a piece of history like James Bond’s DB10. For some, this is the best way to finance a car.

More About PCH

Hire Purchase

If you’re 100% committed to owning the car, then you’re perhaps best suited to this option. This finance solution guarantees full ownership of the car when the agreement ends – the finance is effectively secured against the car.

It’s definitely worth considering that the size of your deposit or part-exchange will affect the amount you pay monthly. A larger deposit or part exchange reducing this figure substantially.

More About Hire Purchase

Things to consider when getting a car on finance

With so many options available, you could still be wondering what the best way to finance a car is for you. So to help, we’ve provided a handy summary of your options below:

- Pay cash – good for bargaining but not so good for your bank balance

- Personal Loans – you’ll own the car outright but you need to shop around and a near perfect credit rating

- PCP – very flexible, with low deposit, affordable repayments and short agreements

- PCH – you’ll hire the car and never own it. However, more affordable and can include maintenance package

- Hire Purchase – traditional way to pay for your car; deposit and monthly payments often larger, but you will own the car once paid

To help you on your journey to get behind the wheel, we will always help you identify the most suitable finance route, dependant on your needs and your circumstances.

We work with a panel of expert car finance lenders who treat every customer as an individual. Our vast experience in the industry means we’re able to offer a wide range of deals, including 0% interest, low or zero deposit offers, even car finance solutions for those customers who may have had credit problems in the past.

We also offer you the best way to buy a car online. Fill out our quick-to-complete form to apply and we can often let you know if you are eligible within minutes. And by using what’s called a ‘soft search’ your enquiry won’t affect your credit score either. We hope we’ve helped you find the best way to finance a car.

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