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Buying a new car can be confusing as not only are there thousands of models to choose from, there’s also the question of how best to pay for the car.
From buying it outright, using a finance model or credit to buy it, to leasing instead of owning a car, here we explore all your options to help you decide the best way to finance your car.
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Cash
The most straightforward and cheapest way to buy a car is to buy it outright with cash.
You hand over the money to the dealer, or whoever you’re buying it from, and then it is yours and you won’t need to make any further payments towards the cost of the car.
This option works if you’ve enough money to hand and can comfortably afford to spend it on the new car.
Aside from the usual costs of keeping a car such as servicing, road tax, fuel, car insurance and parking, you won’t have to pay anything more towards the actual cost of the car if you buy it with cash.
You won’t need to pay any interest, unlike if you buy a car on finance or use a credit card or personal loan to pay for it.
Bear in mind you should always keep three to six months expenses in an instant access savings account in case of emergency, so think carefully before you spend too much of your savings on a new vehicle.
If you don’t have enough cash to buy a car outright, you can still use the money to pay for some of the cost or to put down a bigger deposit, so you can borrow a smaller amount to pay for the rest.
Credit card
If you don’t have the cash to buy a car outright, a credit card is an option. If you pay on a credit card, either for all of the cost or for the deposit, you will then need to clear the balance on the card before the due date on your statement otherwise you will start paying interest.
The exception is if you can get a card that offers 0% interest on new purchases. This could give you as much as 18 months or more before you need to start paying interest on the balance, and could be a cost-effective way of paying for your car if you can clear the bill during the interest-free period. However to qualify for an interest-free card you will need a good credit score.
Even if you do pay interest on the card, it’s worth looking at how much you’re being charged. If you are able to get a market-leading credit card, the interest might be relatively low – or at least less than you’d pay for a finance contract or a personal loan.
Another benefit of using a credit card is the protection it offers under Section 75 of the Consumer Credit Act 1974.
Under Section 75, if you use a credit card for part of the payment, as long as the value of the car is between £100 and £30,000, the credit card company will be jointly liable, with the car dealer, if anything goes wrong. You don’t need to spend £100 or more on the card either, any amount you put on the card will give you protection, even if it’s only £1.
Before you commit to paying with a credit card, always check what fees are involved. Some dealers will add a fee on if you’re using a credit card while others may set a minimum amount they’ll allow on credit card or may not allow you to pay with one at all.
You should also think carefully about whether you can afford your credit card repayments and consider the consequences of missed payments – such as fees and marks on your credit history – or not making big enough repayments each month. If you don’t fully repay the debt during any interest-free period, your debt could quickly spiral.
Personal loan
Another option to consider is buying a car with a personal loan, also known as an unsecured loan.
Once you know the amount you want to borrow, for example a £5,000 loan or £10,000 loan, you can compare personal loans and their interest rates to see what is available to you. Loan repayments are made on a monthly basis for a fixed period of time – the shorter the term you request, the larger the repayments will be, but the less interest you will pay overall.
One benefit of using a personal loan is that you own the car outright as soon as you get your vehicle. If you use car finance, the lender will own the car while you make repayments.
The rate you’re given will depend upon your credit score and it’s well worth using a free eligibility calculator before applying. This will give you an idea of the type of loan you can apply for and it won’t leave a mark on your credit score.
If you have an excellent credit score and can access the most competitive rates, a personal loan will often be one of the cheapest ways to buy a car, aside from cash.
» MORE: Car finance vs personal loan
Car finance
Car finance is one of the most popular ways to get a new vehicle. The Finance and Leasing Association reported that a total of 93% of private new car sales were acquired on some kind of car finance in the 12 months to 2021. It doesn’t have to be brand new either, you can buy a used car this way too.
When you buy a car on finance, the loan is secured against the car. This means that you won’t own the car while you are making repayments, unlike if you pay for a car in cash or with a personal loan.
Car finance allows you to pay for a car in instalments, which could make it more affordable than buying it outright. However, you will have to pay interest on the loan, and the finance provider may set mileage restrictions and other conditions that you would have to stick to.
There are a few different ways to buy a car on finance but most require you to pay an initial deposit and then to agree to a set term during which you make monthly payments towards the car. Here we look at the most popular:
Hire purchase (HP)
With hire purchase, you will pay an initial deposit. You will then pay for the rest of the car in monthly instalments, and at the end of the contract term you’ll then have to pay a final sum before the car is yours.
Personal contract purchase (PCP)
PCP car finance normally has lower monthly repayments than other types of car finance as your payments only cover the estimated depreciation of the vehicle, rather than its full value.
You’ll usually pay an initial deposit, then make monthly repayments for the agreed term. At the end of the contract you’ll be given three options. You can pay a balloon payment to own the car, you can swap it for another car, or you can hand it back to the dealer.
Conditional sale
A conditional sale agreement works in a similar way to HP. At the start of the contract the cost of the car is split between the deposit and monthly payments and you make these during the contract. When it ends you own the car outright. If you don’t keep up with the payments, the lender may repossess the car.
Leasing a car
If you don’t want to buy a car, or you aren’t able to, leasing is an option. With a lease, also called personal contract hire, you essentially rent the car from the provider. You pay an initial deposit and then make monthly payments until the end of the contract when you hand the car back.
If you take out a car lease, you will never be the owner of the car and you’ll always be making repayments, so it is unlikely to be the cheapest option if you want to keep a car for the long-term. There are also some strict terms when you lease a car, such as mileage limits for example.
However, it does offer flexibility and allows you to regularly change your car. If you want to upgrade your car every couple of years for the latest model, leasing may be an option.
» MORE: Should I lease or buy a car?
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