Car finance: the options

Buying a new car is a great feeling. Whether you're buying a big new family car or downsizing to a smaller model, just knowing that you're getting a new set of wheels can feel pretty exciting. As with any major purchase, it's always a good idea to have a wish list of just what you're looking for, to shop around and test drive as many as you can, and not to feel forced into a purchase by sales agents. Your wish list will probably feature things like number of doors and seats, air conditioning, in-built sat nav, heated windscreen, and stereo etc., and you need to establish what is vital and what is just a preference. Probably the biggest thing you do need to consider is your budget; just how much can you afford?

There are a number of ways of paying for a new car, but if you are using credit in any way, you need to make sure that you can afford the repayments. Don't be tempted into buying a more expensive model than you can really afford, as you will struggle to make your payments and could end up in debt.


If you're lucky enough to have some savings put aside, you could simply pay cash, of course. This is the cheapest option, too, as you won't be incurring any interest costs. However, it isn't really a good idea to clean yourself out completely, so make sure you still have enough savings put by for emergency use. It could be that you use cash to part-finance your payment, using one of the other methods to make up the balance.

Credit card

Even if you have enough cash to make an outright purchase, you might be better advised to pay on your credit card, as long as you are disciplined enough to pay the balance off in full as soon as you get your next bill. Credit card payments carry certain legal protections which you won't get by paying cash.

Hire purchase

This type of credit is arranged directly with the car dealer, and you will usually need to pay a deposit (10% is the norm). The interest rates are usually very competitive, and you can choose to repay over one to five years. Bear in mind, however, that you won't actually own your car until the very last payment is made.

Personal loan

If you have a good credit rating, a personal loan is actually the most cost-effective way of taking credit out for your car. You can arrange this yourself with your bank, building society or any other finance provider. An independent financial adviser might be able to help you find the best deal. Look carefully at the small print, including the annual percentage rate (APR) and any other associated costs or charges. If you are part-paying cash, you may just want to take out a small loan to cover the difference. A word of caution, however; it's not advisable to secure a loan against your home, as your property is then at risk if you fall behind with payments.

Personal leasing

By leasing your car, you make a monthly payment to the dealer which covers the use of the car, along with maintenance and servicing costs. Your agreement will establish the limit for mileage you can use, and when the term of the agreement ends, you return the car. This type of agreement usually carries a three-month deposit. It's a good option if you are looking for flexibility and don't mind not owning the car.

Personal Contract Plan

A little more complex than a hire purchase agreement, a personal contract plan (PCP) can offer you a lower monthly payment. It covers the difference between the sale price of the car and the price to resell it to the dealer. At the end of your agreed term, you can sell the car back, keep it (and pay the resale price) or trade it in and start again.

Whichever option you choose, it is important to be thorough and research all of the costs. Look at everything, including early repayment charges, penalties for exceeding agreed mileage and interest rates over the whole term of repayment.

A special thanks to Edwin Miles, Underwriting Manager at for contributing this useful guide.

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