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Jamie Gibbs

Car finance explained

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With so many options to choose from, we’re here to help you find the best way to fund your car.

 
Car finance

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Cash | Credit card | Loan | Hire purchase | Personal contract purchase

So you’ve found the car for you, but it’s a little pricey. What do you do?

There are a number of options available to you – here we look at the pros and cons of each method of financing your car.

Cash

We don’t just mean handing over a fat stack of £20 notes to the dealer. By “cash”, we also mean:

  • bank transfer

  • debit card

  • cheque

  • dipping into your savings

  • asking a mate or family member to lend you the money

Pros

Paying in cash means you own the car outright, and there are no other payments to make in order to make the car yours. You’re also able to sell the car whenever you please – if you want to upgrade or you need some extra cash.

Cons

There’s the obvious drawback of a large chunk of your money suddenly disappearing from your bank account. And some dealers may not give you much room for haggling if they know that you’re paying in cash.

This is because many dealers get profit from the finance deals they sell. So if they’re losing out on that potential money, they may try to make up for it elsewhere.

Be aware that not all dealers will accept cash, so it's worth having an alternative payment method to hand, just in case.

 

Credit card

What if cash isn’t an option and you’re hesitant to try one of the finance packages offered to you? Then it’s possible to buy a car using a credit card. This will depend on the price of the car and the credit limit offered to you.

Pros

As with cash, paying on a credit card means you own the car outright. Also, so long as you meet the minimum payment amount, your monthly payments can be flexible to suit your circumstances.
As you’re paying on credit, you’ll have some protection with the Consumer Credit Act.

Cons

In order to get a competitive interest rate, your credit rating needs to be pretty robust. Most credit cards are capped at £5,000, and if you’re only making the minimum payments each month, you could end up paying way over the odds for the car.

Car salesman handing keys to driver

Personal loan 

There are two types of personal loan that you’re likely to come across. Unsecured loans are when you don’t have to offer up any kind of collateral in order to get the money. This means less risk to you, but higher interest rates.

Secured loans tend to have lower rates, but if you don’t keep up with the repayments you risk losing whatever it was you used as collateral, eg your car.

Pros

Unlike other finance agreements, you don’t need to pay a deposit to get a loan. Plus you’re able to offset the amount you borrow by paying partly in cash.

Cons

You’ll need to have the loan agreed before you buy the car, which can become a more drawn-out process than you first bargained for.

If you have a poor credit rating, or if you've not borrowed in the past, you might not be eligible for the best rates.

 

Hire purchase

If a car dealer starts talking about HP, they’re not giving you their bacon butty sauce preferences. Hire purchase, or HP, is where you hire the car until you’ve fully paid for it, after which time it’s yours to keep.

There’s usually an initial deposit of 10% to pay with this kind of finance.

Pros

A hire purchase agreement could mean you’re able to afford a more expensive car than you would otherwise. Also, you get to keep the car at the end of the agreement.

Cons

You can’t sell the car while there’s outstanding finance on it – doing so could land you in hot water.

You’re also more likely to see higher monthly payments for a hire purchase car than with other forms of finance.

Personal contract purchase

Personal contract purchase, or PCP, is similar to hire purchase in that you make monthly payments with an initial deposit, and you don’t own the car while you’re making the payments.

The difference here is that, once the agreement has ended, you have the option of making a final “balloon payment” to buy the car and keep it. Alternatively, you can swap the car for a different one and take out another contract.

Pros

PCP deals tend to have lower monthly payments than with higher purchase, and you have the option of getting a new car every few years.

Cons

In order to own the car you need to make a larger final payment. Plus, if you want to be accepted for a PCP deal, you usually have to agree to an annual mileage cap.

If you decide to swap the car after the agreement finishes, you can only do so if there's still value left in the car. If there's not much value left, you might need to pay another deposit in order to swap for a new car.

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