Drive smart: Navigating your car finance options
July 4, 2024
It’s July, which means 242 cars are here and you may be tempted to upgrade to a new, or new-to-you car. While paying with savings is always the most straightforward and cheapest way to buy a new car, not everyone has this option.
Here, we’ll look at the three main car finance options: personal loans, hire purchase, and personal contract plans (PCP). We’ll also look at the benefits of paying with savings and give you tips to avoid unnecessary debt.
Top Tip
If you are taking out finance for a car, remember that you can use your savings as well as your trade-in to increase the deposit. This will reduce your repayments and the total amount of interest that you pay.
Personal Loans
A personal loan from a bank or credit union is one way to finance a car purchase. Here’s what you need to know:
- Ownership: With a personal loan, you own the car from the start.
- Flexibility: You can choose the loan term and repayment schedule that suits you. Remember, a longer term will mean cheaper repayments each week/month, but you will pay more interest than if you took out a shorter term.
- Interest rates: Rates can vary, so it’s important to shop around. Use our Money Tool for free, independent loan comparisons to find the best deal.
- Total cost: Be aware of the total repayment amount, including interest.
Hire Purchase
Hire Purchase (HP) is another common way to finance a car. Under HP, you hire the car and pay for it in instalments. It has the benefit that the dealer can organise the finance quickly for you, but there are other considerations:
- Ownership: You only own the car after the final payment. This means you cannot sell the car without the finance company’s permission.
- Deposit: Typically, you need to pay a deposit (usually 10-20% of the car’s price).
- Higher costs: HP agreements often have fees in addition to the interest rate. It’s important to compare the total cost to that of a personal loan if you’re considering HP.
Personal Contract Plan (PCP)
PCP is a popular option due to its lower monthly payments compared to HP; however, to own the car at the end you will have to pay a large final payment. Here’s how it usually works:
- Deposit: You pay a deposit upfront.
- Monthly payments: Lower than HP because you’re only paying off part of the car’s value.
- Final payment: If you want to own the car at the end of the term, you have to make a large final payment (also known as a balloon payment). Alternatively, you can also trade in the car and use it as a deposit for a new one. The final option is to hand it back, but if you do this, you will lose any equity you have in the car. Learn more about Personal Contract Plans (PCPs).
- Mileage and condition: There are often mileage limits and car condition requirements. If your mileage is higher than agreed, or the condition isn’t as agreed, you may face additional charges.
PCP can be appealing due to lower monthly payments, but it can end up being more expensive if you decide to keep the car at the end of the term.
Avoiding Unnecessary Debt
When considering car finance, it’s essential to avoid taking on unnecessary debt. Here are some tips:
- Assess your budget: Determine what you can realistically afford without stretching your finances. Make sure to consider the repayments for the full length of any finance arrangement. For example, if you take out a five-year loan and are looking for a mortgage in three years, the debt may reduce the amount you can borrow for your mortgage.
- Shop around: Use comparison tools like our Money Tool to find the best loan rates.
- Read the fine print: Ask as many questions as necessary to ensure you understand all terms and conditions of the finance agreement before signing the contract
- Consider the total cost: Look beyond monthly payments and consider the overall cost, including interest and fees.
- Avoid impulse decisions: Take your time to evaluate all options and avoid high-pressure sales tactics. A shiny new car can become a problem if you end up struggling to meet the payments! If you are having difficulty making repayments, see our Money Hub for more information.
By understanding these financing options, you can make an informed decision and avoid unnecessary debt. Remember, paying with savings is always best if you can manage it, but if you need to finance, choose the option that best suits your financial situation.
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