Car Financing in 2018: What Are My Options?
If you’re looking to buy a new (or ‘new to you’) car this year, you may be wondering how to go about it. There are a myriad of possibilities available when it comes to how you pay, depending on your situation and the type of car you are looking for. In this week’s article, we’ll be breaking down the benefits and drawbacks of the most popular car financing options, to help you decide which road to take. We have identified six different ways to fund a new or second-hand car – read on to find out more…
If you’ve been planning to buy a new car for some time, you may have already started saving. When you pay with ‘cash’ this may literally mean handing over cash, using a debit card or paying via a bank transfer – you’re paying for the vehicle without needing to borrow, and therefore it is a fairly straightforward transaction. This type of purchase could apply to vehicles from private sellers or from dealerships – there are a wide range of options with this method.
- You own your vehicle outright from day one
- You can sell your vehicle whenever you like, on your terms
- You can choose to buy a vehicle from any type of seller
- Your purchase is not protected should something go wrong, as it would be with a credit card, for example
- It may take a long time to save the money required
- You may not be able to haggle or negotiate extras with dealerships if you’re not signing up for a long-term payment contract
Taking a personal loan
If you like the idea of owning your new car outright from the beginning, but you don’t have the savings in place to achieve this, a personal loan could be the answer. If you are eligible for an unsecured loan, this money can be used to buy a car outright; just like the cash option above. With unsecured loans, you agree to pay a certain amount back each month for a set number of months until the loan and interest is cleared.
- You don’t need to pay a deposit or have any savings available up-front
- You can choose to buy a vehicle from any seller
- The loan is based on your credit score and not secured on the vehicle itself
- You can sell your vehicle whenever you like
- If you have a poor credit rating or if you are a first time borrower, you may not qualify for the best interest rates, making the loan more expensive
- If your car breaks down or sustains damage and becomes unusable, the loan still has to be paid back as per the credit agreement
Hire purchase, or HP for short, is a popular car finance method which allows you to obtain a decent car with a small deposit, followed by agreed monthly payments for a certain time period. This is a type of loan secured against the car itself, which means if you do not stick to the repayment plan, you may have the vehicle taken away. Once you have completed all contractual payment installments, the car belongs to you.
- A HP loan is secured against the car rather than your credit history, so if you have been turned down for a personal loan, HP could be a solution
- HP requires just a small deposit of 10% or less
- If something goes wrong with the car that isn’t your fault, there are likely to be some protections in place
- You cannot sell or modify your vehicle until the full HP loan is paid
- You can only buy a car from a dealership that offers a HP option, rather than a private seller
Personal contract purchase
Personal contract purchase (or PCP) is a popular option for those who wish to drive a relatively new car (up to 4 years old), without having to pay the high costs upfront. With PCP, you put down a small deposit and pay an agreed amount each month for a fixed period of time, just like HP. These monthly payments are low, and cover the depreciation of the value of the vehicle. At the end of the loan term, you’ll be given a choice – either pay a single larger ‘balloon payment’ and own the car outright, or start a new contract and receive a different vehicle to drive.
- You can enjoy driving a new car every few years, if you choose to continue your contracts
- You get to drive a new vehicle for a small down payment and monthly cost
- If something goes wrong with the car which isn’t your fault, you’re protected
- Unless you pay the final balloon payment, you will never own your vehicle. Therefore, you cannot sell or modify the car
- When you take out the Personal Contract Purchase you will agree to a yearly mileage restriction. If you go over this, you will need to pay additional costs – usually a set amount per extra mile
Leasing a car is very similar to PCP, in that a small deposit and monthly payment is required for an agreed period. When you lease a car however, you will not usually be offered the balloon payment option, which means you’ll never have the opportunity to own the car. Essentially, leasing a vehicle is a long-term car rental and usually only applies to brand new vehicles, meaning that it can be a relatively cheap way to get behind the wheel of a swanky new car.
- You can drive a brand new car for a fraction of the upfront cost, compared to buying outright
- If something goes wrong with the car, you are protected. Your contract is also likely to include breakdown cover, road tax and servicing saving you hundreds of pounds every year
- You will never own the vehicle and therefore cannot sell or modify it
- You are limited on the amount of miles you can drive per year, and will be charged if you exceed this amount
- If something goes wrong with the car and it’s your fault, you could be liable for large additional charges
Using Credit cards
If you’d prefer to own your vehicle outright and you don’t want to go down the cash or personal loan route, you may have considered paying for a car with a credit card. This can be an expensive option long-term, particularly if you don’t qualify for the best credit card rates, so it’s always best to check your options before committing to anything.
- You can buy a car from wherever you like, as long as they take credit cards, and you’ll own it outright from day one
- Your purchase is protected under Section 75
- If you have a very good credit score and you qualify for the best deals, you could pay 0% interest
- You get to choose how much you pay off each month, as long as it’s at least the minimum payment
- A credit card may not offer a large enough limit to buy your chosen vehicle outright
- If you do not qualify for a 0% credit card and only pay the minimum payments each month, the cost is likely to spiral taking years to pay off
Whichever of the above car finance options appeals to you, it’s always important to do plenty of research and shop around before making any final decisions. -If you find any of the financial terms confusing, read our handy ‘Jargon Buster’. Consider your strengths and weaknesses when it comes to your finances, the type of car you want and what the possible risks are, and you should be well-placed to make the best decision for you.