Buying a new car is an exciting time. With such a wide range of vehicles to choose from it can be far too easy to get caught up in selecting the perfect car, however, it’s very important to look at the finance options available.
There are many finance options to consider and this is a serious decision to make as you will likely be committing to a term that will last for a few years at least.
Making a good decision about how you finance your car can make a huge difference to your disposable income and the total amount you pay for your next car. This makes the right finance deal arguably even more important than picking a well-priced car, or at least equally important. Luckily, John Clark Motor Group has broken down each method of financing your car that is available to you.
What Finance Methods are Available?
So, what options do you actually have when it comes to financing your next car? Quite a few actually.
- Paying outright with cash
- Personal loan
- Paying with a credit card
- Hire purchase
- PCP deals
- Contract hire
Pay Outright with Cash
This might appear obvious but if your financial situation allows it, paying for a car outright is the cheapest way to secure your next car. You will have no interest to pay and have flexibility if you need to sell the car on shorter notice.
Another reason to opt for this style of finance if possible is that savings rates are incredibly unattractive. Cash in the bank depreciates gradually if left just sitting idle in the bank. Rates offered from the bank are also incredibly unattractive, often not beating inflation at the moment.
Do be careful not to eat into your savings buffer when using this method as you never know what is just around the corner. Typically you will want around three months wages available as a buffer at any time.
Buy a Car with a Personal Loan
Using a personal loan through a bank is another way to secure that new car. For this method to be viable, you will need a solid credit history. If so this can be a decent option. One benefit of paying for your car with a loan is that it can be done over a longer term than you will typically find on other styles of finance.
There are a broad range of lenders to choose from with a wide array of APR’s shopping around for your best deal can really pay off.
Plus points of using a loan to pay for it include that you own the car outright from day one, it’s quick and easy to arrange, and that you can combine this with another method such as cash payments.
Pay for a Car on a Credit Card
Putting large payments on a credit card is a popular way to cover large payments and for good reason. Using a credit card offers additional protection if something goes wrong. In very broad strokes as long as you meet your monthly payments any car between £100 and £30,000 will be covered by ‘section 75’ of the Consumer Credit Act.
Since dealers do favour other finance plans such as PCP or Hire Purchase since it offers more money for dealers. Some dealers do charge a card handling fee that can be as high as 3% and not all dealers will accept card payments.
The protection of your credit card is a big plus here but it is worth noting that other types of finance, however, interest rates on credit cards can be a fair bit higher than other types of finance. Do think carefully before you choose this option and do the maths on other options available.
Buy your Car with a Hire Purchase Deal
This is the first of three types of dealer finance we will cover. Hire purchase is an increasingly popular option. The way this one works that you put down a deposit, this is incredibly flexible but is typically around 10%.
In essence, it’s a secured loan against your car that you will pay off on monthly installments over a fixed term. At the end of the term you will own the car outright, just as if you paid it off as a loan. There is also no painful balloon payment at the end as you will find with PCP financing. Rates are incredibly competitive for this style of financing, you will, however, find that new car deals offer better deals.
A few of the perks of this style of finance include once you have paid a third of the car the lender will not be able to repossess your car via court order. Also, once 50% of the car has been covered you might be able to return the car and not make any more payments. You will need to check your contract before though to ensure it covers this. The car will of course need to be in good condition though.
Buy your Car with a PCP Deal
PCP finance is very similar to Hire Purchase but with a few crucial twists. Firstly, your monthly payment will be a bit lower. The trade-off here though is that the total amount you pay will be a bit higher.
You do still require a deposit and the amount you put down will determine the rate you pay each month. It also will last over a term of generally one to four years, just like Hire Purchase.
At the end of the term, you will not completely own the car with this method. But you do have a few options. These include giving the car back and walking away, trading the car in and going for another PCP deal, or paying a ‘balloon payment’ to own the car in full.
Since you don’t own the car until that balloon payment has been settled there are rules you have to adhere to, this includes mileage limitations that lead to additional fees if you go over it. Fees can also apply if there has been any damage to the car.
In case you plan to travel internationally you will want to be clear on what your contract says. Some will stipulate how many days you can take the vehicle out of the country.
You might be able to end your deal early if you’ve paid off at least half of the outstanding balance. You will need to be at least halfway through your deal though. Of course, the car will still need to be in good condition for this.
Get a Contract Hire Car
Another option on offer from car dealers is to get a contract hire car. Like PCP and HP these styles of car finance run for a specific period of time, typically one to three years. You will pay a fixed monthly fee allowing you to effectively budget. You will likely need to put down a fair deposit though.
This style of car finance will include maintenance and servicing avoiding any surprise bills during your term. You also don’t need to think about depreciation. Just like PCP deals, there will be a fixed mileage you won’t want to go over as you will incur additional fees.