Whether brand new or second-hand, buying a car can be expensive so you need to find the most cost-effective way of funding the purchase, writes journalist Rob Griffin.
With the new 14-plates rolling out of showrooms this March, many motorists will be making a new car purchase in the coming weeks and months.
So, if you’re one of the many people buying a brand new car in 2014, or if you've got your eye on a second-hand motor - here’s what you should consider when it comes to finances.
1. Borrowing from friends and family
If you have someone that can lend you the money – either free of interest or at a very low rate – then this will be the cheapest option.
However, plenty of friendships have been destroyed and family rifts created over money so please bear that in mind.
2. Using your savings
More than half of car buyers - 52% - will use their savings to buy a car, according to the AA Car Purchase Index.
When you consider that even the best cash ISA accounts are only paying out pretty miserly amounts you won’t be missing out a great deal.
Also, while it’s good to have a rainy day fund, the cost of repaying a loan will be more than savings interest you’ll receive.
3. Put it on the credit card
If you can get a credit card with a decent interest-free period on new purchases then this might be worth considering.
Obviously this will depend on whether the issuer grants you enough of a limit.
At the end of the term you can either clear the debt or switch it to another card.
4. Taking out a personal loan
One in five borrowers will take out a personal loan to buy a car this year, according to the AA.
There are very competitive interest rates available with rates for loans between £7,500 and £15,000 the lowest they’ve been for over a decade, according to Nerys Lewis, head of loans at Confused.com.
"The lowest rate available for a loan of £7,500 over five years is 4.5% APR and is available from Santander," she says.
Strangely, you can sometimes be better off borrowing more than you need. For example, loans below £7,500 have higher APRs than the ones above.
"Borrowing £7,000 over five years will cost you £1,061 in interest - 5.8% APR - through either Clydesdale, Sainsbury's or Yorkshire Bank.
"Whereas borrowing an extra £500 means you only pay £871.20 in interest through Santander," she adds.
5. Car finance agreements
Every dealer will have some form of finance deals available and some may offer zero per cent deals.
However, in these situations the on-the-road price may be considerably higher than the arrangement offered to cash buyers.
Other options include hire purchase, which involves paying a deposit – usually around 10% – and then repaying the balance, plus interest, over the loan period.
You won’t own the car until the last payment has been made, points out Ian Crowder of AA Cars.
"If you miss a payment the finance company can also reclaim the car," he says.
"Interest rates are quite high but if you pay up to the end the car is yours and, in the process, you will have earned yourself brownie points for your credit record."
6. Personal contract purchases
Then there are personal contract purchases, which are particularly suitable for those changing their cars every few years.
You pay a deposit – around 10% – and low-monthly instalments over a fixed period, but defer a lump sum until the end of the contract.
At the end of the term you have the choice of paying back this lump sum, handing the car back, or selling it privately to clear the outstanding balance.
You will, however, need to maintain the car well and stick to the agreed mileage.
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