Deciding to purchase a car is an exciting time for most people, but, as with most semi-large investments, the route by which you actually pay for your new set of wheels can be a tough decision to make. Thankfully, there are several options available, including paying by cash or credit card, taking out a personal loan or entering into an agreement with a car finance company.

The one you choose will depend on many personal factors. We outline each option available so that you can come to an informed decision as to which is best for you.

Independent finance options

Cash

While purchasing a vehicle with cash may not be viable for the majority of average Joes, the avid savers amongst us can benefit from doing so for several reasons. Not only will you own the car outright, but you also won’t be indebted to any finance brokers or lenders. Moreover, you won’t be charged interest and you also avoid any bills on your credit card.

Credit card

Just like any other big purchase, you can buy a vehicle on a credit card, so long as you have a large enough credit limit to enable this. However, not all car dealers accept credit cards as a form of payment, while others may charge additional fees for doing so - some even as high as 3%.

Personal loans

This is one of the easiest and most common ways to buy a car and involves arranging a personal loan with your bank, building society or a finance provider. You won’t need a deposit to take out the loan and the car will be yours to own right away. It is also flexible since you can spread the loan repayment over a period of your choosing.

The downside, however, is that the APR is often quite high, which means this option doesn’t suit everyone. Moreover, in order to get a loan on reasonable terms, most lenders will require you to have a good credit score.

Dealer Finance Options

Hire Purchase Agreement (HP)

This is one of the simplest and most popular ways to buy a car on finance. With an HP agreement, the borrower, after paying an initial deposit (usually around 10%), is able to split the total cost of a new or used car into fixed instalments each month; the amount and length of which is agreed upon beforehand. As the borrower knows how much they will be required to pay each month, it means they are able to better control their budget and spending.

Once all the monthly instalments are paid off, you are the legal owner of the car. Many finance companies will allow you to end the HP agreement early if you can afford to pay the remaining debt owed on the car. This is a flexible option and is usually straightforward to arrange, however, HP tends to work out more costly when the contract is short-term.

Personal Contract Purchase (PCP)

Similar to HP, a PCP involves paying a deposit, again around 10% normally, followed by monthly instalments over an agreed fixed period. The monthly instalments tend to be lower than with HP, though the amount paid back is often larger. At the end of the agreement, the borrower can either; choose to pay a lump sum to purchase the car (a balloon payment), return the vehicle, or sell it privately in order to finalise the remaining balance.

It is important to note that if you don’t intend on keeping the vehicle, you may be charged additional costs for wear and tear, damage or excessive mileage use. It’s, therefore, a good idea to drive carefully so the car remains as ship shape and shiny as possible!

Personal Contract Hire (PCH) - Leasing

Similar to PCP, this type of agreement involves fixed monthly payments, usually at a low cost. Normally, the person leasing the car will have to pay three months’ rental in advance. The difference with PCH, however, is that the vehicle is never yours - you are simply paying for use of the car and will have to hand it back at the end of the lease term. No extra costs will be incurred, as long as the borrower doesn’t exceed the specified mileage limits.

Top tips:

  • Keep your credit rating as clean as possible so that you can negotiate good loan deals.
  • Only take out a loan if you are good at managing your finances and are certain you have enough income to make steady repayments, since lenders can file lawsuits against those who fail to make payment.
  • Always shop around for the best deals, taking into account the monthly repayments, APR, admin fees, mileage limits and more.
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