A car is a vital purchase for many households. However, it can be an expensive purchase. Luckily, there are numerous ways to buy a car that you can facilitate if you cannot afford to pay outright for a new motor.
However, much like with anything, you need to be aware of the options available to you, exactly what these finance methods entail and if there are any cons to choosing one over another. The more informed you are, the better the decision you will make, and you will not regret it a few months later.
With that in mind, what are your options for funding your next car purchase?
Cash Payment
First and foremost, we have the cash payment. You can simply walk into a dealership, negotiate a private sale, head off to an auction with a set amount of cash, see what is available in your budget and purchase a car you like.
However, having a set budget can be restrictive as it can eliminate some options from your decision, and not everyone is able to save enough to get the car they want. But for people who want an easy transaction and don’t want the hassle of monthly payments or restrictions on car usage and maintenance, then a cash sale can be the right option for you. There are no interest or balloon payments; you own the car outright and can drive it off. If you have an existing vehicle, you can Sell my car and trade it in to help you boost the cash pot, but even if you don’t, you can still ask for a cash discount, although whether or not this is offered will be at the seller’s discretion.
Bank Loan
If you have a good credit rating, you can consider taking out a bank loan. You can use a bank loan for many different purchases, a car being one of them. And while a bank loan won’t have the same restrictions or caveats as a car loan, it is still a lump sum you must pay back.
If you are borrowing money to fund your next car purchase, a bank loan can be a simple way of raising the funds. You don’t need to put down a deposit, the money is ready to use in your account immediately, and you don’t have to shop through specific dealers, making it a good option for those who want to buy privately.
That being said, you do still need to pay the loan back. You need to factor the repayments into your budget and expenses regarding outgoings and be confident you can afford them.
The only limitations for getting a bank loan would be that you might not get approved for the amount you want, or the interest could be high, meaning you are paying more than expected throughout the loan. Still, for flexibility, it is most definitely an option.
Credit Cards
Purchasing a car on your credit card can be a viable choice for people with a high limit for purchases; however, this can be risky. Credit cards typically have interest rates. If you don’t repay the amount you borrowed back quickly, you could pay a lot more than you want, thanks to monthly interest fees on the outstanding balance.
If you are going to use your credit card to purchase a car, it might be worth looking for balance transfer deals that offer you 0% interest for a certain period to allow you to pay some of all of the amount off before interest is added. If you have a good credit score, you can do this across more than one card to take advantage of the best deals; however, this will impact your credit, and missing any payments or being tempted to use cleared credit balances can increase the debt you owe. So, while it sounds good in theory, remember how you use credit can influence how likely you are to get accepted, and you need to be careful you are not opening too many accounts in a short space of time. Not to mention, there is no guarantee your application will be accepted if you are looking at doing this.
PCP
A PCP or personal contract purchase is a loan that covers the car’s depreciation value over the time you own it for. Typically, a PCP lasts for 2-3 years and will require you to make a balloon payment at the end of the contract to own the car outright.
There are some pros and cons of this purchase option. Pros include the flexibility of the contract; you can buy the car outright for a reduced sum to own it, you can hand the cast back and walk away or you can take out another PCP. Plus, you usually only put down around a 10% deposit, making getting a more expensive vehicle easier.
The downsides of this arrangement include a lack of choice of cars. Usually, PCP is only available for vehicles worth over £10,000, the balloon payment can be expensive on top of what you have been paying, and there is a milage cap put in place by the lender limiting how many miles you can drive in any given time frame.
HP
HP or hire purchase is also an excellent option to consider when buying a car. Again, HP is typically only offered on vehicles over £10,000, so you are already committing repayments of huge sums plus interest. However, unlike PCP, there is no balloon payment at the end, and once you have made all the required payments, you own the car outright. But should you fall behind with your payments or be unable to meet your contractual obligations regarding making timely monthly payments, then you are at risk of the car being repossessed.
HP does offer more benefits in that you can get accepted even if you have bad credit, and you can tailor the length of the plan and the repayment schedule to your finances, making it easier for you to commit. But HP does mean you will be paying back more overall over the length of the contract.
PCH
Personal contract hire is essentially a long-term hire agreement where you don’t actually own the car; you are simply hiring it. These are usually agreements that last a few years, and as there is no loan, there is no interest to pay and no lump sums.
One benefit of PCH is that the monthly repayments are usually considerably lower than the above two options, and while your payments will be fixed at the start of the hire term, you can upgrade or change your car every couple of years as per the terms of the agreement. This is ideal for those who enjoy having a new car but want to eliminate the cost of buying one or taking out loans to cover the cost.
Much like the other finance options, there are some drawbacks, notably that you never own the car. You will also need to put down around 6 months’ worth of payments as a deposit, which can be a lot depending on the vehicle you choose, and if you do have bad credit, your repayments will be considerably higher. Again, failing to make the payments on time each month will result in your forfeiting the right to use the car as it’s not yours; you are just hiring it.
Finding the money to make a car purchase isn’t always easy. But there are many ways to buy a car that you can choose to help you make the right decision based on the information at hand. Always check your finances before you go car shopping and know what type of credit agreement you are happy to take out your maximum budget and what conditions or exclusions you agree to when taking out any contract for your car.