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Guide to Car Finance
Buying a car is likely to be one of the bigger purchases you’ll make, so it’s a good idea to check that you have all of the relevant information you need to make an informed decision. Our ultimate car buyer’s guide will help you to weigh up the pros and cons around the different car finance options.
A leasing agreement is a long-term rental contract where you pay a fixed monthly amount to use the car for a certain period of time and number of miles. There are two main types of agreement –personal contract purchase and personal contract hire.
With a personal contract purchase, you will usually pay a deposit and then a monthly amount for around two to three years. At the end of the contract, you can either give the car back to the dealer, make a one-off payment to purchase the car, or trade the car in and start a new plan. This type of purchase is usually only available when buying a new car.
Personal contract hire works in a similar way, but instead of a deposit you will pay three months rental payments in advance and give the car back at the end of the contract period. With contract hire you can often opt to include servicing costs in the monthly rental. Because you never own the car the leasing company is responsible for paying any car tax that is due. Again contract hire is generally only available on new cars.
You could take out a personal loan from a bank, building society or loan provider and spread the cost of the car over one to seven years. The monthly repayments on a personal loan will vary depending on how good your credit history is. If you have an excellent credit record this can be a cost-effective way of buying a new or used car, with loan rates starting at around 4% APR.
Some dealers, especially those specialising in used cars, may offer access to personal loans. Whilst it might seem convenient to sign up whilst you are in the showroom, make sure that you compare the rate offered by the dealer with those offered elsewhere in the market.
An independent loan is likely to be your best option if you are planning on buying a used car from a private seller.
Another type of loan that you can get from a dealer or independent car finance providers is hire purchase. A hire purchase plan will typically require you to put down a deposit or part exchange your car, before committing to monthly instalments. When you have paid all of these instalments off, the car is yours.
During this time, if you fall behind with your payments then the hire purchase provider has a right to repossess your vehicle. This will be done as a last resort though, and you will get plenty of warning before this can happen.
With a hire purchase plan, you will not be able to privately sell your car until the final instalment has been paid off. If you want to end the agreement early, you may have to pay a penalty fee.
Hire purchase car finance can be a good option if you have less than perfect credit record. Because the lender has the security of owning the car until you’ve paid off the loan there is less risk for them.
If you have the money to hand and can afford to, you could pay with cash. When doing this, make sure that you leave yourself with enough money left over for any emergency expenses. If you don’t have enough money saved up to make a cash payment in full, you could always use whatever cash that you do have to make a deposit or pay in part for the car. Paying with cash, is a good opportunity to get a discount, so don’t be afraid to haggle!
Trading in your car is a convenient way to get rid of your old car and purchase a new one. It is likely that you’ll get less for your car then if you were to sell it privately, but you’ll be able to avoid the work and expense of selling it on your own. To make sure that you receive the best price for your used car, do your research beforehand and look up how much your car would sell for privately. Remember, if you’re not happy with the price offered to you, you could always try your luck elsewhere.
When buying from a car dealer, you could take advantage of any dealer finance offers that are available. Many dealerships will offer 0% finance when you choose to purchase a car through them and as part of this offer. You will typically need to pay a large upfront deposit for the car (usually 35% or more) but you then incur no interest on your monthly repayments. The down side of this, is that if you miss any payments you will usually be switched to a higher interest rate. A dealer is also less likely to give you any further discount on top of a 0% finance deal.
Depending on the interest rate on your credit card, and the credit limit available to you, it may be possible to pay all or part of the cost of your car on a credit card. For example if you have a 36 month 0% balance transfer credit card with a £3,000 limit you may be able to transfer (say) £2,500 into your current account and use that to buy the car you have your eye on. Remember that you may be charged a balance transfer fee – often around 3% of the amount transferred. Providing you pay off the balance on your credit card within the offer period this can be a cost effective way of borrowing. But remember if you miss or are late with a credit card payment you may lose your 0% or low-interest offer. This could leave you paying off the car at a much higher rate of interest.
You may be able to pay for all or part of the car directly in the dealership with your credit card. Be aware, however, that some dealers will charge a card-handling fee (possibly as much as 3%) and some may not even accept a credit card as payment, so it’s a good idea to do your research.
By using a credit card to pay for all or part of a car’s purchase price, such as the deposit, you can protect yourself against the full cost of the car. This is because when you spend between £100 and £30,000 on a credit card, you are covered under Section 75 of the Consumer Credit Act. This means that if anything goes wrong with your purchases, you can claim back the money from your credit card provider. To read more about this, click here.