Finance

Deciding which payment option meets your needs

Choosing how to pay for your car is an important decision, so take time to think through each of the following options.

Cash

  • This is nearly always the most cost-effective way to buy a car if you have enough in savings.
  • As long as you’d have enough savings left to cover any other major purchases or unexpected costs in the future, paying cash is the best way to buy your car. Here are the main reasons why:
  • Buying your car with cash means you own it straight away, so if you got into financial difficulties you could sell it. You can’t do this if you have a car finance agreement such as leasing or hire purchase.
  • While interest rates are low, it often makes sense to use savings rather than borrowing at a higher rate of interest. For example, if you have £1,000 in a savings account it will only earn you around £20 in interest in a year. If you borrow £1,000 to buy your car, you’d have to pay around £90 interest on the loan in a year. So you’d end up £70 worse off than if you used your savings to buy the car.
  • If you don’t have enough savings to buy the car outright, you could use them to give you the biggest deposit possible so you spend less on loan interest.

Personal loan

  • With a personal loan from a bank or building society you can spread the cost over one to nine years. The monthly repayments can be higher than for other options, but you own the car and the total amount you pay should work out less than most other methods.
  • Personal loans are usually the cheapest way to borrow over the long term. But if your credit rating isn’t good you may find it difficult to get one. You may need to consider one of the financing methods offered by car dealers instead.
  • Shop around for the best interest rate by comparing annual percentage rates (APR). The APR includes interest and all of the lender’s other charges.
  • Also check the monthly repayment amount and the total amount that you’d end up paying the lender.
  • If you’re not sure whether you could meet the monthly payments on top of your household expenses, work out what you can afford.
  • Personal loans come with a cooling-off period from either the date you sign the loan agreement or from when you receive a copy of it – whichever is later. If you cancel, you have up to 30 days to repay the capital and interest.
  • Can be arranged over the phone, internet or face-to-face.
  • Can be for the whole cost of the car, or for a part of it.
  • Good fixed interest rate if you shop around and have a good credit rating.
  • You choose the loan period (12, 24, 36 months and so on), but remember – the longer the term the more you pay in interest overall. For example, if you were to borrow £10,000 over two years at 5.9% APR, the interest cost would be £614. Borrow the same amount over five years and it would be £1,541.
  • Unlike with other forms of credit, you own the car while paying off the loan so if you got into financial difficulties you could sell it. To be on the safe side, check with the lender that this would be the case before taking out the loan.

Hire purchase

  • After paying a deposit of normally around 10%, you make fixed monthly payment over an agreed period. The car isn’t yours until after the final payment, unlike with a personal loan.
  • With hire purchase you usually (but not always) will have to put down a deposit of 10% of the value of the car. You then pay the rest of the value of the car in instalments, over a period of one to five years.
  • You are in effect hiring the car until you make your final payment, after which you own it.
  • Hire purchase is arranged by the car dealer, but brokers also offer this service. The rates are often very competitive for new cars, but less so for used cars.
  • The loan is secured against the car, which is why you can’t own it until you’ve made your last payment.

Car leasing

  • This is more like a long-term rental, in that you make fixed monthly payments to use the car until the contract expires. There are two main types of car leasing – personal contract hire (PCH) and personal contract purchase (PCP).
  • The payments tend to be lower than with other types of car finance, but there’s a mileage restriction. And with PCH you’ll never own the car, whereas with PCP you have the option of buying the car at the end of the contract by making a ‘balloon payment’.
  • Leasing a car is effectively long-term rental – you pay a fixed monthly fee to use the car for an agreed time period and number of miles.
  • Under a PCH agreement, you never own the vehicle and you have to hand it back at the end of the term. With a PCP agreement, you have the option to buy the vehicle at the end of the term in exchange for a balloon payment.
  • With PCP you also need to pay a deposit and with PCH you usually have to pay three months’ rental in advance.
  • As with all rental agreements, there are some restrictions you need to bear in mind:
  • If you cancel your contract and return the car you’ll probably have to pay a fee, or may even be liable to pay all the outstanding rental payments.
  • You won’t be able to modify the car in any way – for example, adding a tow-bar – without permission. However, you can ask the leasing company to make modifications before you take it.
  • If you exceed the agreed mileage, you’ll have to pay a penalty for this extra mileage at the end of the agreement.

You must return the car in “good repair and condition” (taking into account “fair wear and tear”). So if, for example, your dog scratches the car, you may be charged to cover the cost of putting this damage right.

If you plan on taking your car abroad, you may need to get written permission from the finance company each time you do so and there may also be a charge.