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Rob Griffin

The cheapest way to buy a new car

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Buying a car can be expensive so you need to find the most cost-effective way of funding the purchase. We go through the six main options.

Man handing woman car keys

Sales of new cars hit an all-time record in 2015 according to trade body Society of Motor Manufacturers and Traders, and the trend looks set to continue this year.

So, if you’re one of the many people buying a new car - or even if you've got your eye on a secondhand motor - here’s what you should consider when it comes to finance.

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 is almost certain to be more than savings interest you’ll receive.

3. Put it on the credit card

Woman using a credit card online

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.

Our tips on choosing between a credit card a loan could help you decide the best option for you when buying your next car.

4. Taking out a personal loan

One in five borrowers use their personal loans to buy a car according to the AA.

Personal loans typically offer between £1,000 and £35,000, with most unsecured loans offering a fixed interest rate.

So for example, if you're looking to borrow £8,000, with a 3.3% APR over three years, your monthly repayments would be £233.54, and you would pay back £8,407.44 in total.

If you're thinking of applying for a loan, it's important to do your homework. Consider how much you want to borrow and for how long.

Base your borrowing on how much you can comfortably afford to repay.

Use the loan calculator to see how much you'll need to borrow or pay back.

5. Car finance agreements

Car with coins

Every dealer will have some form of finance deals available and some may offer zero per cent deals.

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 (PCPs), 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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