If you’re buying a new car, you need to think about how you’re going to pay for it. There are plenty of options to choose from but it’s important you know all the possibilities before committing to anything.
While many people go for the finance options recommended by the dealer, it’s best to shop around so you can make sure you’re getting the best deal available to you.
Just like you need to consider running, maintenance and insurance costs when choosing your car, you need to consider monthly repayment amounts, interest rates and additional payments when deciding how to pay for your car.
You need to understand how and when you’ll pay, the positives and negatives of each potential option and whether you could save money by choosing something different to what you might be leaning towards. We’ve put together some of the pros and cons of some of the most popular ways to pay for a car – but remember, you should pick the one that’s right for you.
Paying out a large sum of money isn’t possible for everyone, but paying for your car in full on the day you buy it could be the best option if you can afford it.
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Personal Contract Purchase (PCP) is a popular way of financing a car. With a PCP deal you don’t make repayments on the full value of the car, which can mean the monthly repayments are lower than some of the other options.
However, at the end of the finance you’ll be left with a large payment known as the guaranteed future value (GFV) or balloon payment, and an ‘option to purchase’ fee to pay if you want to own the car. Or, you can return the car. The GFV or balloon payment is the amount of the vehicle value that the finance lender off-sets to the end of the finance term, based on its anticipated age and mileage.
Although you’ll be the registered keeper, you won’t technically own the car – you’ll be hiring it from the company you got the PCP deal from. At the end of the agreement, you’ll have three options:
PCP is mostly offered on brand new cars, but is available for used cars too depending on the age of the car. Admiral Car Finance only offers PCP on nearly-new and used cars.
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Hire Purchase means you hire the car for a period of time by paying monthly instalments. Although you’ll be the registered keeper of the car, you won’t own the car until you’ve paid your final monthly instalment, and an ‘option to purchase’ fee.
With Hire Purchase you normally have to put down a deposit – usually at least 10% – and pay off the remaining amount as a fixed monthly payment over an agreed period of time.
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A Personal Contract Hire agreement, commonly known as leasing, is basically a long-term rental. Unlike PCP and HP finance, you don’t get the option of keeping the car at the end of your contract.
Maintenance costs are often included, but you might have to put down a large ‘initial rental’ that you won’t get back, like a deposit. MOT, insurance and tax can also be included in the payment which makes things easier but can mean you have a more expensive monthly repayment.
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Taking out an unsecured personal loan to buy your car could be a cost-effective way to fund your exciting new purchase, depending on the cost of your car, as you may find that you can get lower interest rates. Bear in mind that most personal loans are limited to a maximum of £25,000.
If you don’t have a good credit score, you may find yourself unable to access the more competitive APRs on personal loans. Factors that affect this include:
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Depending on the cost of the car, a 0% credit card could be one of the more cost-effective options. This gives you extra protection if something goes wrong, as long as you pay at least £100 of it by card and meet your monthly card payments.
The 0% offer is usually for a limited time, so as well as factoring in if you can meet the minimum monthly payment amount needed, you’ll need to be able to pay the full amount off by the time the 0% offer runs out or you’ll find yourself paying much higher rates of interest.
Remember that you might not be able to access some of the best credit card deals unless you have a good credit score.
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This is the most important consideration to make, and something you must be happy with before signing on the dotted line. Make sure the loan or finance option is affordable for you, and that you can still afford all your other existing commitments and essentials like your mortgage, bills and cost of living. Think about whether your financial circumstances may change in the future, and whether you’ll be able to afford the repayments then.
If you’re worried you might be getting into financial difficulties, contact Citizens Advice – they’ll be able to give you the right advice for your circumstances.
Visit Admiral Car Finance and use our car finance calculator to find out more.