Buying a new car can be daunting. Especially with all the jargon around different financing models. But we’re here to cut through the confusion.
We’ve put together a guide on the different ways you can buy a car. In simple terms.
Then you can decide which option best suits you.
1. Hire Purchase (HP)
Using Hire Purchase to buy your car is like having a mortgage.
You normally put down a deposit and repay the balance in instalments over a loan period.
These payments will also include interest.
At the end of the loan period, the car is yours.
The car will be yours outright at the end.
You don’t normally have mileage restrictions.
Loan periods can be flexible.
Your car could be repossessed if you miss a payment.
You can’t sell or modify the car without express permission.
Missing a payment could affect your credit score.
2. Personal Contract Purchase (PCP)
A Personal Contract Purchase (PCP) could be a good option if you like changing your car every two or three years.
It isn't a loan for the full cost of the car. Your loan covers the difference between the car’s value new and the car’s value at the end of the hire agreement.
If you’re confused, don’t worry.
Let’s say you sign up for PCP over three years. The car costs £10,000 and the finance company predicts the car will be worth £5,000 at the end of the three years.
You pay a 10% deposit of £1,000.
You then owe £9,000 and effectively have a loan of this amount.
But because it’s been agreed that the car will be worth £5,000 at the end of the agreement, you only need to pay £4,000 over three years.
You’ll have to pay interest on the entire £9,000 when you make your monthly payments, though.
When the loan period is up, you can then either pay the final £5,000 to keep the car. Or you can hand the car back.
You’ll have to keep the car in good condition and usually stick to an agreed mileage.
Monthly payments tend to be lower than a personal loan or hire purchase.
Low initial deposit.
No concern over depreciation of car as you can hand it back at end.
You won’t own the car during the contract period.
Interest rates can be higher on PCP than on personal loans.
There can be extra charges if you go over the agreed set mileage.
3. Personal Leasing (contract hire)
Leasing a car is like renting a house or flat.
You pay a fixed monthly fee over an agreed time.
You’ll normally pay a deposit, which can be three to six times the monthly payment you’d make.
At the end of the agreement, you hand the car back.
And if it’s in good condition and you’re within the agreed mileage, you shouldn’t have to pay a penny extra.
Flexible payment terms.
You don’t have to worry about the car depreciating in value.
Simple contract – pay monthly and hand back at the end of contract.
The car is never yours.
You must return the car in sellable condition, so you may be stung with charges if you damage it.
May have to keep within a set mileage.
4. Personal Loan
This is where you borrow a sum of money from a lender and agree to pay it back through fixed monthly payments.
You’ll be charged interest on the loan, so you repay the amount you borrowed plus interest.
Once the money comes into your account, you can treat it like cash, letting you buy your new car outright.
Before you get a loan, there are few things to bear in mind, like your credit score and your credit history.
Your credit score could affect how much a lender is willing to give you.
If your credit history isn’t great, you could risk getting rejected for a loan. Which can also harm your credit score.
And taking out a personal loan could impact your credit score as lenders perform hard credit checks.
Use our free personal loan calculator to see how much you may end up paying.
You’ll own the car.
You won’t be restricted by dealer demands e.g. mileage limits.
You should be able to choose the length of the loan period.
Your car’s value could depreciate. So, if you want to sell it, it could be worth less than you paid for it.
Your monthly payments could be higher than other forms of finance, but this depends on the terms and costs involved.
Could be difficult to get if you have a low credit score.
5. Buying with your credit card
Buying a new car on your credit card is just like buying anything else on a credit card.
The full amount is paid up front, and you pay your credit card company back over the coming months.
You may have to pay interest on the outstanding amount, but some companies offer 0% interest as an introductory offer.
As long as you pay it off within that time, you may not have to pay any interest.
You should also be able to choose how much you pay back each month. But you must meet the minimum monthly payments.
The bad news is some dealers won’t let you pay on a credit card.
And sometimes, those that do may put a limit on how much you can pay by card, or even charge extra.
Some credit card companies may also limit how much you can spend on an individual purchase.
But if you’re able to pay with your credit card, you have strong consumer protection.
Under Section 75 of the Consumer Credit Act, you’re protected with purchases between £100 - £30,000 if:
The company has failed to supply your car.
The car is not up to standard.
The dealer has mispresented what they’re selling.
You’re protected under Consumer Credit Act.
If you want, you can just pay the minimum monthly payment. Though this could cost you more in the long run as interest continues to build.
You might be able to take advantage of cashback or rewards tied to your credit card.
Not every dealer accepts credit cards.
Interest rates can be high.
Not everyone will have a high enough credit limit.
6. Buying using your savings
It’s tempting to keep your savings for a rainy day.
But using your savings could be worthwhile if you want to own your car outright.
You’ll own the car outright straight away.
You won’t owe anyone any money.
You’re able to sell the car anytime you want.
The car could depreciate, which means its value may decrease. So, if you want to sell the car in a few years, you’ll get less than what you originally paid for it.
Depending on your savings, you reduce your nest egg for emergencies.
You may be limited in your choice of car depending on how much cash you have saved up.
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