Your car finance options explained
With so many options to choose from, we’re here to help you find the best way to fund your car.
Navigating the different options to fund a car purchase has traditionally been a confusing affair. And it's this confusion that some car dealers rely on to get you hooked into a package you don't fully understand.
In a nation-wide mystery shop, Confused.com looked at 100 car dealerships and found that a general lack of transparency is the root cause of this issue.
With that in mind, let's cut through the confusion and lay out your options when it comes to funding your next car.
Hire purchase, or HP, is a secured loan. The security is the car you're buying - so if you don't keep up with the payments, your car may be taken away.
There’s usually an initial deposit of up to 10% to pay using this kind of finance, followed by monthly payments that pay off its value. After that, the car is yours to keep.
Hire purchase helps you get a car with a low initial deposit. It could also be handy for those who would otherwise be ineligible for decent rates on a personal loan.
The car is only 100% yours after you make the last payment on it. This means that, so long as there's outstanding finance on it, you can't sell it.
If you're thinking about selling the car, you'll typically need to finish paying for it first.
An unsecured personal loan is when you don’t have to offer up any kind of collateral in order to get the money you need. This means less risk to you.
Unlike secured finance agreements, you don’t need to pay a deposit to get a loan.
If you have a poor credit rating, or if you've not borrowed in the past, you might not be eligible for the best interest rates.
Personal contract purchase
Personal contract purchase, or PCP, is similar to hire purchase in some respects, where you make an initial deposit followed by monthly payments.
However, unlike hire purchase, where you pay for the value of the car, PCP payments cover the amount of depreciation against the car. You don't officially own the car while you're still paying for it. This is why you'll need to make a large, final payment in order to own the car outright. This is often referred to as a 'balloon payment' as it's larger than what your monthly payments would be.
Alternatively, at the end of the agreement, you can swap the car for a different one and take out another contract.
PCP deals are usually available for cars of up to four years old. To get a PCP deal, you need to agree the car's value with the lender, who will also impose mileage restrictions as part of the agreement.
PCP deals usually have lower monthly payments than with hire purchase, and you have the option of getting a new car every few years.
In order to own the car you must make that final payment. Also, if you go over the agreed mileage cap, you'll have to pay extra for every additional mile you drive.
It is 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.
Generally, it's the kind of thing that you should only consider if you know exactly what you're doing. There are a number of pitfalls that could result in you paying over the odds and for a much longer period of time.
Paying on a credit card means you own the car outright from day one. 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 should get some protection thanks to the Consumer Credit Act. What’s more, some credit cards offer interest-free deals on purchases, so as long as you pay off your card before the 0% period ends you won’t pay any extra.
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, unless you can get a 0% deal, the APR of a credit card generally isn't as good as that of other car finance options.
This doesn't necessarily mean handing over a fat stack of £20 notes to the seller. 'Cash' basically refers to you paying for the car in one lump sum. This could be using your debit card, paying by cheque or bank transfer.
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.
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 commission 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.
What’s more, when you use cash as opposed to other finance agreements, you won’t get any additional protection for the purchase.
First published 24 June 2016