What’s the best way to finance buying a car?

Buying a car is no simple decision. From buying outright, to buying a car on finance, there are many options. You also have to consider running costs. In fact, it’s probably the second most expensive thing you’ll buy after a home. So it’s important to make sure you get the best deal on financing.

Cash or savings?

When interest rates are so low, it’s likely that your savings will not be earning much in a bank or building society account. So rather than keeping your savings and borrowing at a higher rate of interest, you could use them to fund all or some of the cost of the car.

Remember:

  • You should make sure you have enough savings left over for an emergency after you have paid for your car.
  • If you don’t have enough savings to buy the car outright, you could use them to give you the biggest deposit possible.
  • Even if you use money from your savings you may be better off buying the car on your credit card so you benefit from credit card purchase protection. You should pay the bill off in full the next month.

Use our Car costs calculator to work out the total cost of motoring.

Read our guide How to set a savings goal.

Find out how you can protect yourself from the unexpected.

How you’re protected when you pay by card

Personal loan

Did you know?

Personal loans are usually the cheapest way to finance a car deal, but only if you have a good credit rating.

You can get a personal loan from a bank, building society or finance provider so long as your credit rating is good.

Make sure the loan is not secured against your home. Otherwise you will be putting your home at risk if you failed to keep up with repayments.

Shop around for the best interest rate by comparing the APR (or annual percentage rate, which includes charges you have to pay as well as the interest).

Pros

  • It can be arranged over the phone, internet or face-to-face
  • Covers the whole cost of the car but it doesn’t have to
  • Can charge a competitive fixed interest rate if you shop around

Cons

  • There may be a wait for the funds to appear, although some lenders make funds available almost immediately
  • Other borrowing may be affected

Hire purchase (HP)

Hire purchase is a form of buying a car on finance and is paid in instalments where payments are spread over 12-60 months and you usually (but not always) have to put down a 10% deposit. They are arranged by the car dealer and are often very competitive for new cars (less so for used cars). The loan is secured against the car, so you don’t own it until the last payment is made.

Pros

  • Quick and easy to arrange
  • Low deposit (usually 10%)
  • Flexible repayment terms (from 12 to 60 months)
  • Competitive fixed interest rates

Cons

  • You don’t own the car until the final payment
  • Tends to be more expensive for short-term agreements

Personal contract plan

This type of car finance deal is a variation on hire purchase and tends to result in lower monthly payments. Instead of paying for the car outright, you agree to pay the difference between its sale price and its price for resale back to the dealer. This is based on a forecast of annual mileage over the term of the agreement. Payments are spread over a shorter term of 12 to 36 months.

At the end of the term you can:

  • hand back the car to the dealer and pay nothing
  • trade the car in and start all over again
  • pay the resale price of the car and keep it

Pros

  • Lower monthly payments
  • Low deposit (usually 10%)
  • Flexible repayment terms (from 12 to 36 months)
  • A choice of what to do at end of repayment term

Cons

  • Mileage and condition of car affects the costs
  • Total amount paid may be more than with hire purchase
  • Have to pay the outstanding balance to keep the car

Personal leasing

You can pay the dealer a fixed monthly amount for the use of a car, with servicing and maintenance included, as long as the mileage doesn’t exceed a specified limit. At the end of the agreement, you hand the car back. It never belongs to you.

Pros

  • Motoring at a fixed monthly cost
  • No worries about the car depreciating in value
  • Flexible payment terms (from 12 to 36 months)

Cons

  • Monthly costs are higher because servicing and maintenance are included
  • Need to find a deposit (usually 3 months rental)
  • Possible extra costs if you exceed the mileage limit
  • The car is never yours

Car finance options - Things to look out for

As you compare car financing, there are a few key things to do before making a final choice.

  • Make sure you can afford the monthly payment.
  • Make sure you compare interest rates by looking at the APR (annual percentage rate), which includes all the charges you have to pay. Remember that a higher deposit will normally mean a lower interest rate.
  • Compare the total cost of borrowing, including all charges over the loan.
  • Think carefully before buying payment protection insurance (PPI) or other insurance, such as GAP cover, which can be expensive and may give limited cover. GAP cover is designed to pay out if your car is a total write-off and the outstanding finance is more than the value of your car.
  • Beware of early repayment or other charges, which kick in if you exceed the forecast mileage in personal contract plans (and also personal leasing).

Using your savings is the cheapest option for buying a car, while personal loans are usually the cheapest way to borrow to buy a car, but only if you have a good credit history. If you have a bad credit rating, you may need to choose one of the alternative financing methods to buy a car.

Shop around

The best way to shop around for a good deal is to use an online comparison site. Here are some of the sites you might want to consider.

Helpful information

A guide to financing your new car from the Finance and Leasing Association

Your next step

If you don’t keep up your payments, you may lose your car. So make sure you can meet your car payments.