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The cheapest way to buy a new car

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.

With the new 14-plates rolling out of showrooms this March and 64-plates in September, many motorists will be making a car purchase.

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

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 more than 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% APR and is available from Sainsbury's," 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 £529.40 in interest - 4.9% APR - through Credit Plus.

"Whereas borrowing an extra £500 means you only pay £462.84 in interest through Sainsbury's," she adds.

5. Car finance agreements

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

An agreement over a car

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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Rob Griffin

Rob Griffin

Rob Griffin is a freelance journalist who regularly appears in national publications, including The Independent and Daily Express. He covers motoring, business, and personal finance issues.

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