Ways to Finance a Car

Buying a car is an exciting but almost always daunting prospect – no matter how desperately you need one. It’s a big amount of money and large commitment, and sometimes it can be a bit of a risk, especially if you’re not so clued up on car shopping.

Cars are instrumental to many people across the UK. If you don’t live in a city centre, then public transport can be few and far between – and sometimes non-existent, which makes cars the primary source of transport in a lot of rural areas. And, even in city centres, many people prefer to travel by car because of the accessibility and the privacy a car offers.

However, cars can breakdown, wear out and sometimes just go kaput. On occasion, the repairs may be covered by your insurance or breakdown cover, but sometimes you may just need to buy a new car. Cars are expensive and most dealerships will offer some form of car finance to spread the cost of your new purchase, but car finance isn’t the only way to finance a car and it’s not always the cheapest either.

Alternatives to Car Finances

• Your own savings
• Personal bank loan
• Hire Purchase Agreements (HP)
• Personal Contract Purchase (PCP)
• Credit Card

Your Savings

Obviously, the cheapest way to finance a car is with your own savings. You won’t have to repay any interest as you haven’t borrowed any money, and you will become the owner of the car as soon as the money has been transferred. If your current car is slowly dying, you might be able to save enough over the final few months to buy a new car without taking out any credit, or at least, you might be able to save enough to put a large deposit down and reduce the total amount you have to borrow from any credit provider. However, we know that cars are expensive, and you might not have the time to save for a new one so taking out a loan may be your only option.

Personal Bank Loan

People don’t always think of applying for a bank loan when buying a car, but a low interest rate bank loan is a relatively inexpensive way of borrowing a small sum of money. Usually you can borrow between £2000 and £10,000 and spread the cost over a few years (typically up to 7 years), although you will be subject to a creditworthiness and affordability assessment which usually only accepts people with a good credit score. Using a personal bank loan means you will own the car straightaway, and your contract is just between you and the bank, rather than involving a third party as may be the case with using dealership car finance.

HP and PCP Agreements

If you can’t afford to buy the car outright, getting a hire purchase agreement or a personal contract purchase agreement can be a way around it. These kinds of agreements usually only require a low deposit and often have fixed interest rates which means the lender can’t change how much you’re charged over the loan duration. However, this is a type of secured borrowing (the security being the car itself) which means you won’t own the car until the last repayment has been made. This can sometimes cause issues with insurance as well. For example, if your car is written off before you’ve repaid the agreement in full, your insurer will pay the lender to cover their losses, however you won’t receive any sort of pay-out which leaves you without a car and without any cash to buy a new one. Always check your agreement and your insurance policy in detail before signing any paperwork so you are aware of any terms that may leave you out of pocket.

Credit Cards

If you have a good credit card limit, you could always put the car purchase on a credit card. This means you will own the car outright, and if you encounter any unexpected emergency expenses throughout the month, you can just make a minimum payment towards your credit card to avoid taking out additional credit. Plus, using a credit card provides extra protection if there’re any mishaps. It’s important to remember that only making your minimum payment will take you longer to repay the balance in full and you could end up paying a lot more in interest. If you do buy a car with your credit card, make sure you have a well-budgeted and rigid plan for paying the balance off, so the debt isn’t left hanging over your head.

Shop Around and Budget for the best deal

These aren’t the only ways to finance a car, but they tend to be the most common. Whatever method you choose, always shop around to make sure you get the best deal and don’t feel pressured to accept the dealership’s car finance offer. They likely receive a commission when someone takes out their recommended car finance so they will try to promote it, but it doesn’t mean you have to take it and they certainly shouldn’t force you to take it either.

Before signing any contracts, make sure you’ve budgeted for the new payments. Although your new car may be a necessity, you still need to be able to afford all repayments, especially because missing your repayments will make credit harder to obtain in the future, and in serious cases, your lender may actually gain asset ownership of your car through the courts and sell it to cover their costs.

Remember, buying a car doesn’t cost only the price of the car – you need to factor in insurance costs, road tax, MOTs, and servicing as well. Although these are annual bills, insurance and road tax can be paid monthly (it’ll cost a little more this way) which might help you spread the costs if you can’t afford the payments up front.