Car loans and finance

Buying a car is no simple decision. From buying outright to buying a car on finance, there are many options. You also have to consider running costs. There’s a lot of money involved. In fact, it’s probably the second most expensive thing you’ll buy after a home. So it’s important to make sure you get the best deal on financing. Stay MoneyFit and check out the options for the right one for you.

Why should I use cash or savings when buying a car?

Use our CarBuyer to work out the total cost of motoring.

The cheapest way to buy a car is to fund it all or in part in cash. This is because you'll have to pay interest on any loan or financing agreement.

MONEY FITNESS TIP

If you can't afford to buy the car outright, consider a personal loan. It's usually the cheapest way to finance a car deal - but only if your credit rating is good.

If you decide to use cash, remember 
  • Make sure you have enough savings left over for an emergency after you have paid for your car 
  • If you don’t have enough savings to buy the car in full, use what you can afford to put down the biggest deposit you can.
  • Even if you use money from your savings you may be better off paying for some of the car on your credit card so you benefit from credit card purchase protection - putting just £100 of the cost of the vehicle means the card company is jointly liable with the retailer if something goes wrong. You should pay the bill off in full the next month.  

Buying a car using a personal loan

You can get a personal loan from a bank, building society or finance provider if your credit rating is good. You can spread the cost over one to seven years.

Make sure the loan is not secured against your home. Otherwise you will be putting your home at risk if you fail to keep up with repayments. 

Shop around for the best interest rate by comparing the APR (annual percentage rate, which includes other charges you have to pay on top of the interest).

Pros

  • Usually the cheapest alternative to buying with cash
  • Can be arranged over the phone, internet or face to face 
  • Covers the whole cost of the car (but it doesn’t have to)
  • You can get a competitive fixed interest rate if you shop around

Cons

  • You might have to wait for the funds to be paid into your bank account but some lenders make funds available almost immediately
  • Other borrowing may be affected 
  • Monthly costs can be higher than with other options.

See Bank loans to find out how they work and Understanding APR to get the right deal for you.

Hire purchase (HP) to finance a new car

Hire purchase is a way of buying a car on finance, where the loan is secured against the car. You'll need to pay a deposit of around 10% then make fixed monthly payments over an agreed period.

This means you don't own it until the last payment has been made.

Hire purchase agreements are usually arranged by the car dealer, so are convenient to arrange and can be very competitive for new cars, butless so for used cars. 

Pros

  • Quick and easy to arrange 
  • Low deposit (usually 10%)
  • Flexible repayment terms (from 12 to 60 months)
  • Competitive fixed interest rates 

Cons

  • You don’t own the car until the final payment 
  • Tends to be more expensive for short-term agreements 

Personal contract plan

This type of car finance deal is similar to a hire purchase agreement but you usually make lower monthly payments. Keep in mind though that the total amount of money you'll pay back is often higher.

Instead of getting a loan for the full cost of the car, you get a loan for the difference between its price brand new and the predicted value of the car at the end of the hire agreement.  

This is based on a forecast of annual mileage over the term of the agreement. 

At the end of the term you can:

  • Trade the car in and start all over again
  • Hand back the car to the dealer and pay nothing
  • Pay the final payment, also known as a balloon payment, of the resale price of the car and keep it

Remember the balloon payment will normally range from a few thousand pounds to many thousands of pounds and will be larger than your monthly payment.

Pros

  • Lower monthly payments 
  • Low deposit (usually 10%)
  • Flexible repayment terms (from 12 to 48 months)
  • A choice of what to do at end of repayment term

Cons

  • Exceeding the mileage will usually result in additional charges
  • Excessive wear and tear and damage, such as scratches, can mean you'll pay extra fees  
  • Total amount you pay may be more than with hire purchase
  • You have to pay the outstanding balance to keep the car

Leasing - Personal contract hire (PCH)

You pay the dealer a fixed monthly amount for the use of a car, with servicing and maintenance included, as long as the mileage doesn’t exceed a specified limit. 

At the end of the agreement, you hand the car back. It never belongs to you.

Leasing (PCH) usually costs more per month than PCP. However, you'll have greater flexibility to switch provider and the total cost can work out cheaper overall as the payment includes servicing and maintenance costs.

Pros

  • Motoring at a fixed monthly cost 
  • Includes servicing and maintenance costs
  • No worries about the car depreciating in value
  • Flexible payment terms (from 12 to 36 months)

Cons

  • Monthly costs are higher because servicing and maintenance are included 
  • Deposit is usually three months' rental 
  • Possible extra costs if you exceed the mileage limit or want to end the agreement early
  • The car is never yours

Using a credit card to buy a car

Using a credit card to pay all, or part, of your car’s purchase price will give you extra protection if something goes wrong – as long as you pay at least £100 of it by card and meet your monthly card payments.

However, some dealers charge a card handling fee – sometimes as much as 3% – and some might not accept credit cards at all.

Find out more about using credit cards.

Using peer-to-peer loans to fund a new car

Peer-to-peer loans, or social lending, allow people to borrow or lend from each other without banks or building societies being involved. You can find peer-to-peer loans on websites like Zopa.

You’ll still need a good credit score to get the best rate, and missing payments will also affect your credit rating. Interest rates will vary depending on your credit score too, so you might find peer-to-peer loans offer better interest rates than banks, but this isn’t always the case.

Getting a car on finance: things to look out for

When you compare car finance deals, there are a few key things to do before making a final choice.

  • Make sure you can afford the monthly payment, not just now but for the whole term of the loan. Our Budget planner can help you work this out.  
  • Ask the firm offering you finance, what happens if you struggle to pay one month, and what options would you have if you could not afford to pay.
  • Compare the total cost of borrowing, including all charges over the the full term of the loan.
  • Beware of early repayment or other charges, such as charges for exceeding the forecast mileage in personal contract purchase plans and personal leasing.
  • Compare interest rates by looking at the APR (annual percentage rate), which includes all the charges you have to pay. Remember a higher deposit will usually mean a lower interest rate.
  • Think carefully before buying payment protection insurance (PPI) or other insurance, such as GAP cover, which can be expensive and may give limited cover. GAP cover is designed to pay out if your car is a total write-off and the outstanding finance is more than the value of your car.
  • Will you be able to afford the car's running costs on top of your monthly payment? Use our CarBuyer to work out actual running costs and whether you can afford them.

Using your savings is the cheapest option for buying a car, while personal loans are usually the cheapest way to borrow to buy a car, but only if you have a good credit history. 

If you have a bad credit rating, you may need to choose one of the alternative financing methods to buy a car.

How to shop around for the best car finance deals

The best way to shop around for a good deal is to use an online comparison site. Here are some of the sites you might want to consider.

Helpful information

A guide to financing your new car from the Finance and Leasing Association.

It's not only the cost of buying the car that you need to think about - what about all the running costs? Use our CarBuyerto work out how much your car is really going to cost you and make sure you can afford it.

Last reviewed: 24/04/2018

This content has been provided by the Money Advice Service