Money Advice Service

Buying a car is no simple decision. From buying outright to buying a car on finance, there are many options. You also have to consider running costs. In fact, it’s probably the second most expensive thing you’ll buy - after your home. So it’s important to make sure you choose the best way to buy a car for you.

Why should I use cash or savings when buying a car?

Use our Car costs calculator to work out the total cost of motoring.

The cheapest way to buy a car is to fund all or part of it in cash.

This is because you’ll have to pay interest on any loan or finance agreement.

If you decide to use cash, remember:

  • Make sure you have enough savings left over for an emergency after you have paid for your car.
  • If you don’t have enough savings to buy the car in full, use what you can afford to put down the biggest deposit you can.
  • Even if you use money from your savings you might be better paying for some of the car on your credit card so you benefit from credit card purchase protection – putting just £100 of the cost of the vehicle means the card company is jointly liable with the retailer if something goes wrong. You should pay the bill off in full the next month.
Read our guide on How to set a savings goal.

Buying a car using a personal loan

Did you know?

If you can’t afford cash, a personal loan is usually the cheapest way to finance a car deal - but only if you have a good credit score.

You can get a personal loan from a bank, building society or finance provider if your credit rating is good. You can spread the cost over one to seven years.

Make sure the loan is not secured against your home. Otherwise you’ll be putting your home at risk if you fail to keep up with repayments.

Shop around for the best interest rate by comparing the APR (or annual percentage rate, which includes other charges you have to pay on top of the interest).

Pros

  • Usually the cheapest alternative to buying with cash.
  • Can be arranged over the phone, internet or face-to-face.
  • Covers the whole cost of the car (but it doesn’t have to).
  • You can get a competitive fixed interest rate if you shop around.

Cons

  • You might have to wait for the funds to be paid into your bank account but some lenders make funds available almost immediately.
  • Other borrowing might be affected.
  • Monthly costs can be higher than with other options.
Take a look at our guide on Buying a car through a personal loan for all the information you need.

Hire purchase (HP) to finance a new car

Hire purchase is a way of buying a car on finance, where the loan is secured against the car. You’ll need to pay a deposit of around 10%, then make fixed monthly payments over an agreed time period.

This means you don’t own it until the last payment has been made.

Hire purchase agreements are usually arranged by the car dealer, so are convenient to arrange and can be very competitive for new cars, but less so for used ones.

Pros

  • Quick and easy to arrange.
  • Low deposit (usually 10%).
  • Flexible repayment terms (from 12 to 60 months).
  • Competitive fixed interest rates.

Cons

  • You don’t own the car until the final payment.
  • Tends to be more expensive for short-term agreements.
Read our guide to Buying a car through hire purchase.

Personal contract purchase (PCP)

This type of car finance deal is similar to a hire purchase agreement but you usually make lower monthly payments. Keep in mind though that the total amount of money you’ll pay back is often higher.

Instead of getting a loan for the full cost of the car, you get a loan for the difference between its price brand new and the predicted value of the car at the end of the hire agreement. This is based on a forecast of annual mileage over the term of the agreement.

At the end of the term you can:

  • Trade the car in and start all over again.
  • Hand back the car to the dealer and pay nothing.
  • Pay a final payment, also known as a balloon payment, of the resale price of the car and keep it.

Remember the balloon payment will normally range from a few thousand pounds to many thousands of pounds and will be larger than your monthly payment.

Pros

  • Lower monthly payments.
  • Low deposit (usually 10%).
  • Flexible repayment terms (from 12 to 48 months).
  • A choice of what to do at the end of the repayment term.

Cons

  • Exceeding the mileage will usually result in additional charges.
  • Excessive wear and tear and damage, such as scratches, can mean you’ll pay extra fees.
  • The total amount you pay might be more than with hire purchase.
  • You have to pay the outstanding balance to keep the car.
Find out more about PCPs and whether they’re right for you.

Leasing - Personal contract hire (PCH)

You pay the dealer a fixed monthly amount for the use of a car, with servicing and maintenance included, as long as the mileage doesn’t exceed a specified limit.

At the end of the agreement, you hand the car back. It never belongs to you.

Leasing (PCH) usually costs more per month than PCP. However, you’ll have greater flexibility to switch provider and the total cost can work out cheaper overall as the payment includes servicing and maintenance costs.

Pros

  • Motoring at a fixed monthly cost.
  • Includes servicing and maintenance costs.
  • No worries about the car depreciating in value.
  • Flexible payment terms (from 12 to 36 months).

Cons

  • Monthly costs are higher because servicing and maintenance are included.
  • Deposit is usually three months’ rental.
  • Possible extra costs if you exceed the mileage limit or want to end the agreement early.
  • The car is never yours.
You can find out everything you need to know about leasing a car here.

Using a credit card to buy a car

Using a credit card to pay all, or part, of your car’s purchase price will give you extra protection if something goes wrong – as long as you pay at least £100 of it by card and meet your monthly card payments.

However, some dealers charge a card handling fee – sometimes as much as 3% – and some might not accept credit cards at all.

Find out more about using credit cards.

Using peer-to-peer loans to fund a new car

Peer-to-peer loans, or social lending, allow people to borrow or lend from each other without banks or building societies being involved. You can find peer-to-peer loans on websites like Zopa.

You’ll still need a good credit score to get the best rate, and missing payments will also affect your credit rating. Interest rates will vary depending on your credit score too, so you might find peer-to-peer loans offer better interest rates than banks, but this isn’t always the case.

Find out more about peer-to-peer loans

Getting a car on finance: things to look out for

Make sure you get the most for your current car, whether you’re part-exchanging at the dealership or selling privately.

The more you make on it, the less money you’ll need to raise for your new car.

When you compare car finance deals, there are a few key things to do before making a final choice.

  • Make sure you can afford the monthly payment, not just now but for the whole term of the loan. Our free budget planner can help you work this out.
  • Ask the firm offering you finance what happens if you struggle to pay one month, and what options would you have if you could not afford to pay.
  • Compare the total cost of borrowing, including all charges over the full term of the loan.
  • Beware of early repayment or other charges, such as charges for exceeding the forecast mileage in personal contract purchase plans and personal leasing.
  • Compare interest rates by looking at the APR (annual percentage rate), which includes all the charges you have to pay. Remember a bigger deposit will usually mean a lower interest rate.
  • Think carefully before buying payment protection insurance (PPI) or other insurance, such as GAP cover, which can be expensive and might give limited cover. GAP cover is designed to pay out if your car is a total write-off and the outstanding finance is more than the value of your car.
  • Will you be able to afford the car’s running costs on top of your monthly payment? Use our Car costs calculator to work out actual running costs and whether you can afford them.

Using your savings is the cheapest option for buying a car, while personal loans are usually the cheapest way to borrow to buy a car, but only if you have a good credit history.

If you have a bad credit score, you might need to choose one of the alternative financing methods to buy a car.

How to shop around for the best car finance deals

The best way to shop around for a good deal is to use an online comparison site.

Here are some of the sites you might want to consider.

Helpful information for financing a car

A guide to financing your new car from the Finance and Leasing Association.

Your next step

If you don’t keep up your payments, you might lose your car.

Use our guide to Make sure you can meet your car payments.

This article is provided by the Money Advice Service.