Your choice of car will affect the kind of car finance you can take out. And any kind of loan is a big decision, so it needs to be weighed up carefully.
When it comes to car finance you need to know the different types of loans that are available, and how the kind of car you're after can impact your wallet.
Something old or new?
Newer cars tend to be more economical than their older counterparts (with an equivalent engine size). First, their improved fuel efficiency means that you'll spend less money on petrol or diesel. Second, they tend to have lower CO2 emissions, which in turn can help reduce your road tax.
An older car may be cheaper upfront – you might not even need a loan – but over time frequent and potentially higher maintenance costs could make that purchase a false economy. Worn, run-down parts are more likely to malfunction, and the costs can mount up if multiple repairs are needed.
Individual parts, especially for much older vehicles where they are either out of production or are a 'special order', may also cost considerably more.
See our pages on car maintenance, running costs and the car buyers guide.
If your budget allows for a newer, albeit more expensive car, then you'll have wider choice of reliable vehicles with higher build quality, readily available parts and a more pleasant driving experience. While looks are important, comfort, handling and safety all contribute to an improved and secure journey.
What loan should I choose?
An unsecured loan, usually a type of personal loan, can be used to cover the entire cost of the car, or combined with your cash payment to make up the total. It allows you to own the car completely while you pay off the loan (but always check with the lender), and you can ensure the loan is tied to you rather than the car or any other possessions.
It's regarded as a very flexible option. An unsecured loan allows you evenly divide payments over a period of time – or 'terms' – that you can decide (12, 24, 36 months and so on).
Bear in mind that the longer the repayment period, the longer you will be paying interest. Shop around the loan providers to find the most competitive interest rate.
Often offered by car dealerships, a hire purchase will usually require a 10% deposit of the car's value, and then the remaining cost is paid in monthly instalments. Some dealerships may not ask for a deposit.
The instalments can be spread over 1 to 5 years. During this period you're hiring the car until you complete the final payment to own it. As the loan is secured against the car, it could be repossessed if you miss a payment.
Interest rates can be comparatively low for a hire purchase and they are usually fixed, which can provide added financial security. Keep in mind that while a longer contract will have lower payments, you will also pay more in interest.
Rather than owning a vehicle, some drivers rent or lease a car so they can have a top-of-the-range model without needing a large lump sum or losing any value on it.
The monthly payment amount depends on the car, the length of the deal and the anticipated mileage. If you do exceed the mileage then this can lead to an extra charge.
Leasing a car normally requires a few months' rent to be paid up front. Lease deals also generally include comprehensive insurance to protect against any damage – the higher the car's value, the more expensive the insurance.
Personal contract plan (PCP)
Personal contract plans are very similar to leasing a car, but offer you the option to own the vehicle with a lump sum – or balloon payment – for the remaining cost at the end of the term. However, it's essentially a loan itself, so you can't modify or sell the car in the meantime.
A PCP can require a deposit, but the monthly costs are usually lower than other payment plans or loans.
At the end of the plan, you can either pay the lump sum to own it, return the car to the dealership or manufacturer, or trade it in and start a new deal on a new car.
PCPs may also include a mileage limit, and exceeding that can lead to an additional charge. You would be expected to maintain the car in line with the manufacturer's service schedule, and keep the car in good condition to avoid penalties for any damages.