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60 seconds on car finance

Whether youíre getting an old banger or the latest dream machine, here's a quick summary on how best to pay for it.

Whether youíre getting an old banger or the latest dream machine, here's a quick summary on how to best pay for it.

Iíve been to my dealer. Itís offering me a loan or a PCP plan, but I know I can lease too, or maybe I should just get the cash from the bank... AAAARGGGGGH! Help! OK, calm down. Youíre right - there are almost too many options when it comes to car finance. That means thereís no one right answer. The real key is to understand how each works, how much itíll truly cost you and which one best suits your finances.

Before we even get into that, there are two really important points. First, donít just rely on your dealerís offers. While they may be good, thereís a competitive market out there, so make sure you find out whatís available. Second, do you have any savings? If so, itís often better to use those than to do any form of borrowing. (Have a read of our Use Savings Instead of Borrowing guide for why.)

OK, deep breath time. Letís go one by one. I know I can get a loan from the dealer - is that better than the bank? There are two main types of 'loan' you can get for a car. You can get a standard personal loan. Some dealers offer this and all banks do, so you need to compare your dealer's rate to the cheapest on the market. Currently the best-buys in our Cheap Loans Guide start at 3.9%.

The alternative that dealers offer is hire purchase (HP). While this will feel similar, the loan is secured against your car so if you canít pay it, the car finance company could repossess it to help pay off your debt (it could then still pursue you for more if thatís not enough).

To compare, both will give you an APR and as long as youíre repaying over the same time, the lower APR wins. Do beware sometimes you wonít know the actual APR theyíll charge you until after youíve applied.

OK, but theyíve also given me the option of PCP Ė what on earth is that? PCP, which is short for personal contract purchase, is only available from dealers. It works like this: you pay a deposit, then you pay low monthly sums, typically for two or three years. By then, you've usually paid about two-thirds of the cost, and youíre left with three choices. You can hand the car back, pay a one-off payment to buy it, or trade it in and start a new deal.

So PCP is a bit like leasing but you have the chance to own the car as well? Yes, but donít discount straight leasing, which is simply renting a car. Most people who get PCP donít end up keeping the car, so itís worth contrasting that cost too.

Got it. You donít have any other cheap tricks I should know of, do you? Of course, this is MoneySavingExpert. Another one is if youíve a decent credit score and the person youíre buying from takes credit cards, then sometimes buying a car on a 0% credit card may be cheaper - as long as you can pay it off within the 0% period and you have a big enough credit limit to pay for the car. Currently, new cardholders can get 20 months 0% on purchases. The 0% Card Eligibility Checker shows the best you can get.

If you need cash to pay you can use a 0% money transfer. A few credit cards let newbies 'money transfer' cash into a bank account, so you can use it and owe them instead. It a bit complex, so first read our Money Transfers guide.

At the moment, the best-buys in our balance transfer guide include 32 months 0% for a 4% fee. But watch out Ė most normal cards will charge you a whopping fee for this, so always check. As with any card, always pay off your debt before the promo period ends, or do another balance transfer.

Even if you donít pay the whole car on a card, it's still worth paying the deposit on it if you can. That means if anything goes wrong, the credit card company has to help you put it right (even if the dealership won't). Check the Section 75 rules.

Do make sure you read the top tips on how to manage credit cards in the guides.

OK, I now understand all the options. But how on earth do I choose the one thatís right for me? Look, let's be straight, there isnít a definite answer. It depends on the rates youíre offered. So you need to take your time.

Certainly if youíve got savings that can pay a chunk of the cost, then getting a loan or using the credit card techniques for the remainder give you more flexibility. Yet if you want lower monthly payments and arenít set on actually owning the car, PCP or leasing have their strengths.

Summary

Unsecured loan:

  • Pros: Not secured on the car, so they canít take it if you go into arrears on payments.
  • Cons: Loans can be hard to get as many lenders have very tight credit scoring criteria.

Credit card:

  • Pros: Added Section 75 protection, done right you can borrow for free
  • Cons: Getting a high enough credit limit, dealer might not accept credit cards

HP:

  • Pros: You'll own the car once youíve made all the payments; might get deposit contribution from manufacturer
  • Cons: Higher monthly payments than other methods of buying; the finance company can repossess the car

PCP:

  • Pros: Cheaper monthly payments
  • Cons: You donít own the car unless you make a one-off ("balloon") payment; it's generally more expensive than HP if you want to own the car

Leasing:

  • Pros: Cheap option; maintenance of the car often included
  • Cons: You can never own the car; you need to keep to an agreed mileage limit; you have to pay a deposit

PS. We know these guides are only meant to take 60 seconds to read but some might be a bit longer for now so please bear with us!

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