Car Loan Advice: How to Save Money

When you are thinking of getting a car, there are a number of different options available to you regarding financing:

  • Paying for a car outright.
  • Buying a new car with Hire Purchase (HP) dealer finance.
  • Buying a new car with Personal Contract Purchase (PCP) dealer finance.
  • Leasing a car.
  • Buying a used car with dealer finance.
  • Buying a used car with alternative personal finance.

This article will help you understand these options in better detail.

Paying for a Car Outright

Although buying a car outright may sound like the simplest option, it is worth taking a few things into account:

  • Can you afford the car plus all the extra costs – insurance and tax, for example?
  • If buying a used car, does it need any extra work (for example an MOT) that you have to pay for?
  • If going into an overdraft, or using a credit card, would the interest rate on a car loan make it more affordable in the long term?

Overall though, if you can afford to pay for your car in one lump sum, this is usually good. Remember to haggle as much as you can over the price to see what you can save – the days of ‘a discount for cash?’ are long gone, but it’s still worth discussing the price before simply agreeing to the listed amount.

Buying a New Car with Hire Purchase (HP)

Hire purchase is one of the simplest car finance agreements for getting a new car. With HP you pay a large deposit amount, or initial payment, and then monthly payments over a number of years until the car is fully paid for.

Hire purchase agreements are great for people who want to own their car at the end of the term, and want a simple loan arrangement.

Note that your HP loan is secured by your car, and failure to make payments can result in the car being repossessed, with other associated fees.

Buying a New Car with Personal Contract Purchase (PCP)

There are a lot of similarities between PCP and HP – you pay a deposit amount and then monthly payments for some years (usually three). Under PCP, however, you don’t own the car at the end unless you pay a final (optional) payment – often referred to as a ‘balloon’ payment, which settles the difference between the amount paid so far and the total value of the car.

PCP monthly payments are typically lower than equivalent HP payments and thus can be more affordable. If you plan to upgrade your car after three years anyway, PCP provides a good solution.

Like HP, failure to make your monthly payments can result in the loss of your car and additional penalty fees.

Leasing a Car

When leasing a car, you do not own the vehicle, but enter into a contract which is essentially a long-term hire agreement.

Payments on car leasing include an initial payment, and then monthly payments for the length of the lease – the initial payment is usually adaptable to your needs and the larger it is, the smaller the monthly payments will be.

If you want a new car, with upgrade options regularly available, and you do not care about ownership, then a lease deal can be a perfect solution as it can also take many of the headaches of car ownership away from you.

Buying a Used Car with Dealer Finance

Many dealers will have a system set up where they offer you finance through the dealership. While this is very convenient, often it is little more than a personal loan through their bank secured on the car.

Rates on dealer car loans are often inferior to ones you can get yourself if you shop around, so it is advisable to spend some time researching loans before agreeing to a dealer finance arrangement on a used car.

Buying a Car with Alternative Personal Finance

It is always worth discussing with your bank the options available to you for an unsecured personal loan before going to the dealership to buy a car – you may be able to get a loan on better terms than the dealership will offer and end up paying a lot less for your car in the long term.

When buying a used car, especially if the seller is private, you may not have any option for dealer finance, and will be reliant on an unsecured personal loan or other finance. Many dealers do, however, have finance options for used cars and you should compare the rates with those otherwise available to you.

As a personal loan will not be secured on the car, you do not risk your vehicle being repossessed in the same way as with other car finance, but failure to meet your loan repayments will result in intervention from your bank (which could ultimately include you losing your car), so make sure you understand the situation in full before signing.

Personal loans are available from many lenders – you do not have to go to the bank you hold a current account with, and it pays to shop around to find the best deal.

Shop Around

In all instances, it pays to shop around, discuss and understand your options and return to the best offer once all alternatives have been investigated.

Though it may seem very exciting when buying a car, agreeing to the first finance option offered to you is usually the worst move and could result in you paying a higher rate of interest than you could have found.

Take your time, don’t rush, and remember that waiting a day for your new vehicle while you shop around could save you hundreds, or even thousands, of pounds.

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