Finding finance for your new car purchase
From loans to HP
Work out which option best suits your needs with our round up of the general finance choices available. You'll find providers vary in what they offer, so make sure the product details match your requirements before signing anything.
It Pays to Shop Around
You may have a car to trade in or a cash deposit to put down. But you'll probably still need to find a tidy sum if you're to get the extra money needed to make up the difference.
If you've already found your dream car, it can be tempting to take the dealer's finance package – it's there on a plate. But there's no guarantee it's the best deal around.
Arranging a loan before you visit the dealer also makes you a 'cash buyer' and can put you in a stronger negotiating position.
It's worth visiting on line comparison sites such as The Motley Fool or moneysupermarket
Shopping around beforehand could save you tens or even hundreds of pounds a month.
APR and Flat Rate
For the best comparison, look at the total you'll be repaying over the loan period.
You also need to look at the APR (annual percentage rate). The APR is calculated on the total amount you'll be paying, including interest payments and any set–up fee.
A lower APR means a better–value loan, whereas a lower flat rate might be hiding higher admin costs.
GAP and PPI
If you write off your car in an accident, guaranteed asset protection (GAP) insurance makes sure the loan is paid off if your insurance company doesn't stump up enough to pay off the loan in full.
If you're unable to make your monthly loan payments because you have an accident, get ill or lose your job, payment protection insurance (PPI) steps in. (This depends on the level of cover you take out.) Check any terms and conditions for this type of cover.
Most lenders will offer GAP and/or PPI for an extra monthly charge or a one–off fee.
GAP and PPI give you peace of mind, but the cost can be high. It's important to read the small print to look for exclusions.
Unsecured Personal Loan
You borrow money based on your income and ability to pay. You don't use your house or car as security for a loan.
- The APR and monthly payments are fixed and you pay the loan back over a fixed term.
- You own the car from day one and can sell it at any time, but you still need to finish repaying the loan.
- If you repay your loan early there may be an early repayment fee.
Variations
Flexible loan You can take payment holidays but you may pay a higher APR as a trade off for flexibility. If you pay off a flexible loan early, the company won't charge you a fee for this.
Deferred loan (car purchase loan) You can leave up to 60% of the loan to pay off at the end of the contract to give lower monthly payments.
Secured Loan
You take out a loan using your home or your car as security
- Monthly payments may vary with the interest rate if the interest rate is not fixed.
- Lower monthly payments than an unsecured loan.
- You pay the loan back over a longer period than with an unsecured loan.
- You can borrow more than with an unsecured loan.
Variations
Secured car loan If you take out a loan which is secured on your car, you need to pay off the loan before you can sell the car.
Hire Purchase
The HP company owns the car; you buy it from them over a set time.
- You will usually pay a deposit of between 10% and 15%.
- The car's yours only after you make the final payment.
- You can't sell the car unless the finance company has been repaid in full.
- By putting down a deposit, you have lower monthly payments.
- Many dealers offer HP as an option.
Variations
Balloon payment Some HP companies allow you to leave a large part of the loan to pay off at the end so that you can make lower monthly payments.
Personal Leasing
You lease a car and pay for it by fixed monthly payments. At the end of the term you simply hand the car back and can start leasing again.
If you go over a certain mileage, the leasing company may charge you extra for it. The leasing company may include running costs in the contract.
Personal Contract Purchase (PCP)
You lease a car for a fixed period of time, for a set mileage. Monthly payments will be fixed and you'll be expected to pay a deposit.
- If you don't want to own the car, you can give it back at the end of the term and you won't owe anything.
- If you want to own the car, you need to pay a final lump sum known as the guaranteed future value. If the car is worth more than the expected residual value you can use the difference as the deposit for your next car.
- Monthly payments are usually lower than HP.
- If you go over the set mileage, the leasing company may charge you extra for it.
Variations
Service, maintenance and repair With the all–in price of the car and maintenance, you can budget better for a year's motoring.