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60 seconds on car finance

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

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

I’ve been to my dealer. It’s 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. You’re right - there are almost too many options when it comes to car finance. That means there’s no one right answer. The real key is to understand how each works, how much it’ll truly cost you and which one best suits your finances.

Before we even get into that, there are two really important points. First, don’t just rely on your dealer’s offers. While they may be good, there’s a competitive market out there, so make sure you find out what’s available. Second, do you have any savings? If so, it’s 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. Let’s 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 3.6%.

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

To compare, both will give you an APR and as long as you’re repaying over the same time, the lower APR wins. Do beware sometimes you won’t know the actual APR they’ll charge you until after you’ve applied.

OK, but they’ve also given me the option of PCP – 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 you’re 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 don’t discount straight leasing, which is simply renting a car. Most people who get PCP don’t end up keeping the car, so it’s worth contrasting that cost too.

Got it. You don’t have any other cheap tricks I should know of, do you? Of course, this is MoneySavingExpert. Another one is if you’ve a decent credit score and the person you’re 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 money transfer guide include 29 months 0% for a 4% fee. But watch out – 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 don’t 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 that’s right for me? Look, let's be straight, there isn’t a definite answer. It depends on the rates you’re offered. So you need to take your time.

Certainly if you’ve 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 aren’t set on actually owning the car, PCP or leasing have their strengths.

Summary

Unsecured loan:

  • Pros: Not secured on the car, so they can’t 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 you’ve 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 don’t 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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