How to finance a new car

Holly Thomas / 15 November 2016

Your guide to finding the most cost effective way of financing a new car



If you’re hankering after some new wheels bearing the latest plate, then as well as picking the model, make and design, you will need to find the most cost effective way of financing it - unless you are in the enviable position of simply dipping into a healthy savings pot.

There are plenty of financing options and with interest rates so low these days, borrowing is pretty cheap. The latest data from the Finance & Leasing Association (FLA) reveals that the new car finance market saw a 10% year on year increase in value and 5% by volume in June. Yet signing up to the wrong finance package can cost you dearly.

With that in mind, here’s our guide for funding a new car:

Personal contract purchase (PCPs)

PCPs require a deposit which is usually of 10% of the car’s price. Following that, fixed payments are made each month. After three years, there are three options: make a lump sum payment and take ownership of the car; hand back the keys and walk away; or put any equity built up in the car towards the deposit on another PCP.

Pro: A PCP allows you to drive a new car every few years.

Con: If you get your mileage estimates wrong and end up driving much further than you anticipated you would, you will be charged for extra miles which can run into thousands.

Hire purchase

This is a different kind of contract. It still requires a deposit and monthly instalments, typically between one and five years. You are charged interest, although some dealers will offer interest-free finance deals or make a contribution towards your deposit. Again, check that the interest rate is competitive.

Pro: Monthly payments tend to be lower and include service and maintenance. The leasing company also bears the cost of the car’s depreciation.        

Con: You do not own the car until the loan has been repaid.  If you default on the payments the lender can repossess it.  You are also unable to sell the car until the loan has been repaid. 

Personal loan

Interest rates on personal loans are cheap, especially since the recent cut in interest rates by the Bank of England. However, the best rates of around 3% are reserved for customers who borrow larger amounts - from £7,500 or above. If you choose to borrow below this amount, rates are far higher, at almost 6%.

Pro: Since you are effectively paying with cash, you can haggle hard over the price and ask for freebies thrown in - perhaps breakdown cover.

Con: You are investing your money in a depreciating asset.

Credit card

If the garage you’re buying from accepts credit cards, you could consider paying with plastic. There are a number of cards on the market which charge 0 per cent interest for new purchases.

Pro: As long as you pay back the debt within that time frame, the loan won’t have cost you a penny.

Con: Watch out for handling fees charged by dealers on credit card transactions.

Six costly credit card errors to avoid

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The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.