What is the best way to finance buying a car?

F7 | AUTOMOBILES by Andrew Pearmain.
Mar 15, 2015
3 min read

Buying a car is no simple decision. From buying outright, to buying a car on finance, there are many options. Running costs also have to be considered. 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.

Cash or savings?

When interest rates are so low, it’s likely that your savings will not be earning much in a bank or building society account. So rather than keeping your savings and borrowing at a higher rate of interest, you could use them to fund all or some of the cost of the car.

Remember:

You should 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 outright, you could use them to give you the biggest deposit possible. Even if you use money from your savings you may be better off buying the car on your credit card (although you should pay the bill off in full the next month) so you benefit from credit card purchase protection. Use our Car costs calculator to work out the total cost of motoring.

Read our guide How to set a savings goal.

Find out how you can protect yourself from the unexpected.

How you’re protected when you pay by card.

Personal loan

Did You Know? Personal loans are usually the cheapest way to finance a car deal, but only if you have a good credit rating.

You can get a personal loan from a bank, building society or finance provider so long as your credit rating is good). Make sure the loan is not secured against your home. Otherwise you will be putting your home at risk if you failed to keep up with repayments. Shop around for the best interest rate by comparing the APR (or annual percentage rate, which includes charges you have to pay as well as the interest).

There may be a wait for the funds to appear, although some lenders make funds available almost immediately. Other borrowing may be affected.

Hire purchase (HP)

Hire purchase is a form of buying a car on finance and is paid in instalments where payments are spread over 12-60 months and you usually (but not always) have to put down a 10% deposit. They are arranged by the car dealer and are often very competitive for new cars (less so for used cars). The loan is secured against the car, so you don’t own it until the last payment is made.

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 Full guide to buying a car through hire purchase

Personal contract plan

This type of car finance deal is a variation on hire purchase and tends to result in lower monthly payments. Instead of paying for the car outright, you agree to pay the difference between its sale price and its price for resale back to the dealer, based on a forecast of annual mileage over the term of the agreement. Payments are spread over a shorter term of 12 to 36 months.

At the end of the term you can:

Hand back the car to the dealer and pay nothing Trade the car in and start all over again Pay the resale price of the car and keep it

Pros:

Lower monthly payments Low deposit (usually 10%) Flexible repayment terms (from 12 to 36 months) A choice of what to do at end of repayment term and conditions.

Mileage and condition of car affects the costs Total amount paid may be more than with hire purchase Have to pay the outstanding balance.

I hope this article helps you make the best decision for you if or when you decide to purchase a second hand car. Thanks for reading and if you haven't already done so, please check out F7 on facebook. https://www.facebook.com/F7Enterprises

F7 | AUTOMOBILES.