Your quick guide to car finance

Buying a car with cash can be the cheapest way to afford your next vehicle. You own it outright, avoid paying the interest on monthly repayments and can recoup some of the costs if you sell it in the future. However, not everyone wants to raid their rainy-day savings, is able to buy a new or used car with cash or can fit buying a fresh car outright into their manageable monthly outgoings. If that’s the case, getting a car on finance might be the right choice for you. There are various options available, and while this is by no means advising you of what to do, our quick and easy guide explains each one that’s available to help you choose.

Hire Purchase (HP)

Best for: Drivers wanting simplicity and/or with a poor credit score

This is one of the quickest and most straightforward ways to buy a car on finance. You put down a deposit (often 10% of the car’s value), then pay off fixed monthly instalments over an agreed amount of time.

Only when the final payment is made will you own the car, with all payments secured against it. It does mean if you miss a payment that you could lose the car though, so making sure you can afford them is essential. Check the terms and conditions too, as there may be admin charges and servicing included.

Personal Contract Purchase (PCP)

Best for: Those unsure about their future car needs

A personal contract purchase (PCP) is similar to HP, in that you have to put down a deposit first and make monthly payments over an agreed period. The difference is at the end of the contract you have three options:

  1. Pay a lump sum/balloon payment to purchase the car outright
  2. Return the vehicle
  3. Use any remaining equity on a deposit for a new car and PCP

For those wanting flexibility with what they do with a car at the end of a contract, this can be a good choice. As well as ensuring you can meet the monthly repayments, there will be charges if you go over the agreed mileage or damage the car. It’s important you check the terms of the PCP agreement and what the mileage limits are, so you don’t exceed them.

Personal Contract Hire (PCH)

Best for: Drivers who want the latest models

Similar to PCP, with PCH (sometimes just called leasing) you pay low monthly payments for a set amount of time, but there isn’t an option to buy the vehicle at the end. You’re basically renting a car for a longer period but with a small deposit to pay as well (usually equivalent to three months’ payments).

For this reason, it’s popular with those who want to drive the latest models. At the end of your contract you can simply switch to another new vehicle. The type of car, contract length and mileage limits will affect the overall PCH and monthly repayment costs. Check if maintenance cover is added as an extra charge.

Personal loan

Best for: Car buyers who want the flexibility of finance with the advantage of full car ownership

Own a new or used car outright with the help of a personal (unsecured) loan. This enables you to spread out the purchase cost between one to seven years normally and can be the cheapest way to borrow money in the long term as you don’t need a deposit. If you’ve got some savings, you can combine the two and reduce the amount you borrow.

You’ll need a good credit score to make it easy to get a personal loan with decent rates. The interest rate is likely to be lower than other finance options and it puts you in the position of a cash buyer which may give you an advantage on the forecourt. Our AA car loans calculator can work out your monthly and total repayments whether you are an AA member or not, without leaving a footprint.

0% Finance

Best for: Less picky drivers with some funds available

Some dealers offer 0% finance deals, usually on older models that they’re finding hard to get rid of to make more room on the forecourt. Some may also have a 0% deal on cars priced higher to compensate for the low interest rate, so check the price and compare elsewhere to see whether this is the case. This way you don’t have to pay any interest on your monthly repayments, which can make it a lot more attractive for those looking for a cost-effective option.

However, you usually need to pay a larger deposit (around 35%), so you’ll need some funds stored up already. If you miss any payments, you can be switched to a high interest rate and lose the 0% finance benefit.

Credit card

Best for: Low cost used cars and a riskier option

Depending on the cost of the car you choose and your credit limit, you may be able to cover some or all of the price with a credit card. It’s just the same as making any large purchase with a credit card, so be aware of the APR and whether it might increase.

Some credit cards have 0% interest too, which makes it a lot more affordable, though at the end of the interest free period they’ll revert to an extremely high interest rate (sometimes in excess of 30%). But beware that not all dealers accept credit cards and you’ll need a good credit score to take one out.

Quick car finance checklist

Before you buy a car on finance, make sure you know what you’re signing up for. Our car finance calculator can help you work out what the monthly repayments will be. Before you make your decision, make sure that you know:

  • The APR
  • Your credit score
  • Length of the payment period
  • What’s included (maintenance, services, breakdown cover etc.)
  • Options at the end of the payment period
  • Any potential charges (damage, over mileage etc.)

With a greater understanding of the types of car finance available and their pros and cons, you’ll find it faster and easier to decide on the best way of getting a car on finance for your next vehicle. Our car finance eligibility checker can help you work out if you’ll be able to obtain finance with no obligation and won’t affect your credit score either.

Image courtesy of iStock.

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