A new car purchase is a big expense and can be a difficult one for many people. When it comes to financing a new car, there are a range of options available. Each has its own pros and cons, and the question of which is best depends on your individual circumstances.
Cash
Using cash from savings to buy a car is particularly popular at the moment. Low interest rates mean that savings don’t achieve much from sitting in the bank, leading many to decide they might as well be used for a new car. If you do not feel you can justify using cash for the full value of the car or do not have enough money, you can instead use it to give the biggest deposit you can and benefit from better rates when financing your car through other means. If using cash to buy a new car, you should ensure you keep enough savings for any emergency.
Even if you do have the money to buy the car outright, you might benefit from using a credit card. You will be able to use the money that would have purchased the car to pay off the bill within a month and gain purchase protection which you would not have had when paying cash outright.
Lease
Leasing a car can be a great option for some people, although it is not strictly a way of financing a purchase, because you never own the car. Instead, you pay a fixed monthly amount, and you get the right to use the car as long as you stick within a certain mileage limit. The lease price includes maintenance and servicing. When the deal ends, you simply give the car back.
Advantages of leasing a car is that it’s more affordable in the short term than buying a car outright, as you do not need to find the money for purchase. You will, however, need to find the money for a deposit. You will also not be affected by depreciation in the car’s value. However, the downsides are that you do not own a car, and that the month-by-month cost is inflated by the fact that servicing is included.
Hire Purchase
Hire purchase is, in a sense, a middle ground between buying and leasing a car. You pay a deposit, usually 10%, and the rest of the cost is paid in instalments. Commonly, these will be due monthly over the course of anything between one and five years. Sometimes, the initial deposit may not be necessary and the whole cost will be paid through the instalments.
Hire purchase arrangements will be made by the car dealer, and the deals on offer can often be very attractive. Hire purchase is also available for used cars, but the deals tend to be less competitive. Shorter-term agreements on new cars also tend to be less competitive than longer-term options. The car itself acts as security for the loan, so you only own it when all instalments are paid.
Personal Contract Plan
A variation of higher purchase, a personal contract plan will result in lower payments. Instead of paying for the full price of the car, you pay the difference between its cost when new and the price the dealer will pay to buy it back at the end of the payment period. When the period does come to an end, you have three choices:
• Give the car back to the dealer.
• Pay the remaining portion of the car’s value in order to keep it.
• Trade it in for a new car and begin a new contract.
The key advantage of this approach is that it offers lower repayments than hire purchase. The main disadvantage is that at the end of the contract term, you will have to either hand back the car or pay a comparatively large portion of its value all at once in order to keep it. The amount you ultimately have to pay and the amount that will be covered by handing the car back may also be affected by mileage and condition when the term ends.
Personal Loan
For those with a good credit rating, taking out a personal loan in order to purchase the car could be the most affordable option. Many loans are available from a range of finance providers including banks and building societies and can be arranged online, in person, or by phone. The money from the loan will enable you to purchase the car outright and take ownership of it and then pay back the loan along with interest over a certain period.
Make sure you do not use your home as security for your loan. Otherwise, you will be putting your home at risk in order to purchase the car. It is best to shop around for the best annual percentage rate (APR), which includes interest and other charges. Online comparison sites are the best way to quickly and easily compare the rates on offer from different providers.
