Smart Ways to Finance Buying a car

Smart Ways to Finance Buying a car

- in Automotive

Cutting the cost of driving away with a bargain.

Given the significant cost involved, buying a car is a decision to make carefully. Depending on your resources, your credit score and your income, you could have a range of different options available if you have a good credit score. Even for those with a poor credit rating there are options such as bad credit loans (see ). As a car is the second most expensive purchase that many of us will make (after a home), finding the best way to pay for it is going to be key.

Car finance

There are two main options for buying a car with car finance – Hire Purchase (HP) and a Personal Contract Purchase (PCP).

  1. Hire purchase

With a deposit of around 10% of the car purchase price you can enter into a hire purchase agreement, which is a loan secured against the car. Repayment terms are usually 12 to 60 months, although the shorter the term the more expensive the HP contract is likely to be. Once all the payments have been made on the car then ownership is transferred to you.

  1. Personal Contract Purchase

This type of finance also comes in the form of a loan that is secured against the car and available with a 10% deposit. However, rather than the market value of the car the loan amount is based on the difference between the price of the new car and the predicted value of the car at the end of the hire agreement. There are also more choices when the agreement comes to an end – you can make a “balloon” final payment on the car to keep it or simply hand it back to the dealer. You can also trade the car in for another car with PCP finance. PCP contracts are normally available for 12 to 48 months.

The key differences between HP and PCP are that you will have lower monthly repayments with a PCP (although you may end up paying more overall) and more options when the contract comes to an end. PCP lenders will be much more focused on what happens to the car while in your possession. For example, wear and tear or excessive mileage could lead to additional charges.

A cash purchase

If you have savings set aside then a cash purchase has a number of benefits. You won’t have to pay interest on loans, for example, and you will be able to negotiate a cash discount with the dealer. If you’re using savings to finance buying a car make sure you will have enough left to cover any emergencies and also to pay for the car’s essential expenses, such as maintenance and MOT.

Buying a car with a personal loan

You can apply for personal loans including guarantor loans (more info here) to cover some, or all, of the cost of buying a car. Depending on your credit score, this may be the best way to obtain cheap credit as long as you can afford the repayments. Personal loans are usually available from between one and seven years and shopping around will ensure that you get the lowest interest rates.

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