Car finance explained: how to pay for your new car
A comprehensive guide to hire purchase, PCP, contract hire and more, for anyone buying a new car on finance
Most people use finance when buying cars these days, and choosing between competing finance offers from different manufacturers can be even more complicated than choosing the car you want.
There are still some cash buyers around, but even those fortunate and flush enough to be able to purchase a car outright often prefer to opt for a finance scheme instead. Paying monthly instalments simply makes the cash go further, however big the budget.
Finance doesn’t just work for customers who can maximise their buying power, of course. Manufacturers and dealers both benefit from being able to sell greater numbers of more expensive cars. Both can also make a packet from interest payments on their offers, with expensive APRs all too easily overlooked by finance customers focusing on what a given monthly budget will allow them to drive. Paying insufficient attention to the total cost of a car finance deal is a recipe for throwing money away but plenty of us do it, wrapped up in the excitement of acquiring that ‘must have’ new car as fast and easily as possible.
Not that it’s all bad news for consumers, far from it. Many manufacturers promote their products with extremely low interest rate offers, and some even offer zero per cent finance which means they’ll effectively loan you money for free.
When you’re shopping around, you’ll find car makers, franchised dealer groups, used car supermarkets, online sellers, backstreet dealers and of course even banks and building societies all vying for your finance business with a range of interest rates and different types of finance products. All of which means it’s vital to stay ahead of the game and do your research before signing on anyone’s dotted line.
Different types of car finance
If you're new to vehicle finance, the options available to you could be confusing. There are loans, whether it's from a bank or via the dealer you're buying the car from, while the past few years have seen a rise in Personal Contract Purchase (PCP) deals. These are usually offered by main dealers and are increasingly popular because it means buyers can get into a higher spec car than if they went for a loan. The sheer breadth of finance options available is wide, and the deal that you choose will have a big impact on how affordable your new car is.
The traditional way of getting the car of your dreams - and arguably the most sensible - is to save your money up until you've got the cash to go and buy it. But that can take a long time if you have other outgoings to consider, so finance will be on most people's agenda. The simplest form of finance is either with a credit card or a bank loan. These loans simply get you the cash to buy a car, and won't necessarily be enough to get you into the brand-new model of your dreams.
But that's just one option in the world of finance, and UK car buyers know it, because research by the car industry has found that around 90 per cent of all new car purchases are made on finance. And the options available are covered by three different options: a simple loan, hire purchase, personal contract purchase (PCP) and personal contract hire or personal lease.
With more than 90 per cent of cars bought using a finance package in recent years, car finance has proven to be irresistible for both new vehicle buyers and dealers alike. Beware the timing of purchasing finance however, some months will see greater discounts than others due to factors like new registrations and even Brexit.
Our guide to new car finance weighs up the pros, cons and details of the various options available to new car buyers.
Click the links below or on the top left of this page to get full guides on each of the key car finance options…
How to pay for your new car
- Cash or credit card
- Personal loan
- Hire purchase (HP)
- Personal contract purchase (PCP)
- Personal contract hire and leasing
- Should you buy or lease your new car?
Car finance deals: top tips
Five key points to remember when choosing a car finance deal...
1. Shop around Compare the different types of car finance deals that are available. Look at the APR (Annual Percentage Rate) interest rates and the total cost of borrowing associated with each deal to identify the one that suits you.
2. Don't stretch your finances Only sign up to what you can afford. Don't over-extend yourself to get that better model and make sure you can afford the monthly repayments. Remember that if you pay a bigger deposit then the monthly bills will be smaller and the overall costs will be kept down. If you are struggling with repayments, then Citizens Advice will be able to offer information about what you can do.
3. PPI and GAP insurance can be costly Your financier will offer insurance to cover the repayments if something goes wrong - this is called Payment Protection Insurance, but think carefully before taking it out. PPI may help if you're unable to keep up repayments and GAP insurance will pay out if the car is written-off in an accident while there's still finance to be paid on it. Both are expensive, however, and the terms and conditions of the cover can limit their usefulness. On some loans, PPI was added to the amount borrowed and the borrower would have to pay it off over the term of the loan. This type of PPI policy was banned in 2009.
4. Be aware of additional charges Check the small print and pay particular attention to additional charges that you might incur if you decide to pay the loan off early, or if you exceed the mileage limit (the latter is usually a pence per mile penalty).
5. Keep your credit score up to date Your personal credit score will go some way to determining the extent of the finance packages you can get. Requesting a copy of your credit statement and checking it for mistakes is the first step in improving your score. Repaying your loans in advance or above what is required also boosts your credit rating. Avoid taking on too many loans at once, as this comes across to lenders that you have too many financial commitments and means you may not be able to stretch to any more, making you a credit risk.
- 1Introduction - currently readingA comprehensive guide to hire purchase, PCP, contract hire and more, for anyone buying a new car on finance
- 2Cash or credit cardBuying a car with cash or a credit card sounds simple, but there are plenty of pitfalls
- 3Personal loanA personal loan or logbook loan is a deposit-free way of financing a new car, but it can be expensive
- 4HP (hire purchase)Hire purchase deals split the cost of a new car, and are the favoured method of new car finance in the UK
- 5PCP (personal contract purchase)PCP deals are a popular way of buying cars because they can be very flexible. Here’s how they work…
- 6Contract hire and personal leasingHave you considered hiring a car instead of buying it? That's what leasing agents and personal contract hire schemes offer...