Car finance explained
Finding just the right car can be a challenge but deciding how to pay for it can be even tougher. Here we summarise the payment options available to help you weigh up their different pros and cons.
Deciding which payment option meets your needs
Choosing how to pay for your car is an important decision, so take time to think through each of the following options.
This is nearly always the most cost-effective way to buy a car if you have enough in savings.
With a personal loan from a bank or building society you can spread the cost over one to seven years.
The monthly repayments can be higher than for other options, but you own the car and the total amount you pay should work out less than most other methods.
Personal loans are usually the cheapest way to borrow over the long term. But if your credit rating isn’t good you might find it difficult to get one.
You might need to consider one of the financing methods offered by car dealers instead.
After paying a deposit of normally around 10%, you make fixed monthly payment over an agreed period.
The car isn’t yours until after the final payment, unlike with a personal loan.
This is more like a long-term rental, as you make fixed monthly payments to use the car until the contract expires.
There are two main types of car leasing – personal contract hire (PCH) and personal contract purchase (PCP).
The payments tend to be lower than with other types of car finance, but there’s a mileage restriction.
With PCH you’ll never own the car, whereas with PCP you have the option of buying the car at the end of the contract by making a ‘balloon payment’.
Other car payment options
It’s good to compare APR rates, but make sure you look at the total repayment amount as well.
Using a credit card to pay all, or part, of your car’s purchase price will give you extra protection on the full purchase cost – as long as you pay at least £100 of it by card and meet your monthly card payments.
However, some dealers charge a card-handling fee – sometimes as much as 3% – and some might not accept credit cards at all.
This is borrowing and lending between individuals through websites such as Zopa.
Although peer-to-peer loans bypass traditional financial institutions such as banks or building societies, you still need a good credit score to get the best rate.
Things to remember before making a decision
Make sure you get the most for your existing car, whether you’re part-exchanging at the dealership or selling privately.
The more you make on it, the less money you’ll need to raise for your new car.
If you’re thinking of taking out a personal loan or car finance arrangement, make sure you:
- Remember with leasing, you’re charged a fee if you repay early or exceed the forecast mileage.
- Compare the total cost of borrowing, including interest and all charges over the term of the loan.
- Will be able to afford the car’s running costs on top of your monthly payment. Check your budget then calculate the running costs. Try our Car costs calculator tool.
- Compare interest rates by looking at the annual percentage rate (APR), which includes the interest rate plus all other lender’s charges. The larger your deposit, the lower the interest rate is likely to be.
- Think carefully before buying payment protection insurance or GAP insurance cover paying out if your car is stolen or a total write-off. Both can be expensive and might give limited cover.