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car finance

After deciding on a car you would like to buy, your biggest consideration will then be – how will you pay for it?

There are various financing options to consider – from car dealership loans, personal contract purchase, hire purchase to personal loans, personal contract hire, paying cash, using credit cards and even remortgaging your home!

With so many options available, here is a guide to help you choose the best car finance for you.

Car dealership finance

Car dealers are likely to want to push their own financial products, so it is important to understand the various products they may offer. Always check though, whether you can get a more competitive financial product from an independent broker.

If you do decide to take car dealer finance then you may also want to consider taking out GAP insurance, this covers the difference between what the insurance company may pay you and any finance still owed, should your car be stolen or written off in an accident.

Dealer loan

Similar to a standard personal loan, this is the most straightforward of finance available, but check the APR and overall cost, and see if you can get a better personal loan elsewhere.

Personal Contract Purchase (PCP)

PCP deals are popular with people who want a new car every few years, as by the end of the deal, you will have only paid the cars depreciation and not the full value of the car, making monthly payments more affordable.

Before signing any agreement, the finance company will give your chosen car a guaranteed final value (GFV), which will depend on the deposit, monthly payments and your annual mileage.

In effect, subject to certain conditions being met, the finance company is guaranteeing that the car will be worth at least the remaining balance at the end of your PCP term.

At the end of your PCP term, you then have 3 options:

  • Give the car back.
  • Make a balloon payment that covers the GFV (the cars guaranteed final value) and keep the car.
  • If the car happens to be worth more than the GFV, then use the difference in value towards a deposit for another car.

Hire Purchase (HP)

Similar to PCP, a hire purchase agreement has the car as security for the loan, and until the loan is repaid in full, the car legally belongs to the finance company.

You put down a deposit, and the remaining cost is paid in monthly instalments for the duration of the loan, once the last payment has been made, the car is then legally yours.

Personal loan

A personal loan may offer you a better rate of interest than a dealer loan, but always check the APR, overall cost and terms of the loan.

Personal contract hire (PCH)

PCH is where you hire the car for the long-term, making monthly payments, then simply handing the car back at the end of the agreement, and so never owning the vehicle.

A simple way to get on the road, but effectively you are just renting the vehicle.

Cash payment

A quick and simple way to buy a car, which may also give you better leverage when negotiating the price of the car.

Credit cards

Paying with a credit card will give you up to £30,000 protection under the Consumer Credit Act should anything go wrong.

If you can apply for, and get a 0% interest credit card, then this would be a great way to finance your purchase, but remember to either pay the credit card off before it reverts to a normalised interest rate, or transfer the balance to another 0% interest credit card.

Remortgaging your home

Some interest rates on mortgages are a lot lower than current finance loans, so this could be a viable option, but similar to any loan, the quicker you can pay the full amount back, the less the overall cost of the loan.

Whichever way you decide to fund your purchase, always work out the overall cost of any finance deal for your car.