Buying a car is a major purchase, and choosing the right financing option is a huge decision that shouldn’t be taken lightly. When looking to buy a new vehicle, buyers have a range of choices for how to pay for the car. Although paying from personal savings is always the cheapest and least risky way of financing the purchase, for many people this isn’t an option, so we’ve run through some of the loans that are available to help drivers get on the road.
Unsecured Personal Loan
If you don’t have enough savings in the bank to buy your own car in one payment, an unsecured personal loan can be a relatively inexpensive way to borrow the money for your new vehicle. Many banks and lenders advertise personal loans specifically labelled ‘car loans’, although they tend to be essentially identical to the bank’s normal unsecured personal loan.
The primary benefit to an unsecured personal loan is that it come with no collateral. The lender is trusting that you will be able to repay the loan as per the agreed terms, so you won’t risk your home being repossessed if you fail to meet the repayments. On the flip side, the fact that there is no collateral attached to the loan often means that it can be difficult to find a bank that will agree to lend you the money, particularly if your credit rating isn’t glowing.
The primary advantage to taking out a personal loan to pay for your car is that you won’t need to put a deposit down, which you would have to do if you go with a dealership financing option. This can save you money in the short term.
However, personal loans often have higher Annual Percentage Rate (APR) costs than the loans offered by dealerships, so it’s always worth shopping around for the lowest rates and the best deals to ensure you’re saving money wherever you can. Include the costs of any loan fees with the APR and calculate exactly how much each option will cost you per month and in total.
Hire Purchase (HP)
Many people who are looking to buy a new car opt for hire purchase agreements with the dealership that’s selling the vehicle. With this type of car finance you pay a deposit upfront (usually around 10%, although this can vary) and then pay the car off in installments over a set time period. This can vary from anywhere between 12 and 60 months, depending on how much you’re able to pay off each month.
Hire purchase loans are organised directly with your car dealer, so the car is still technically owned by the dealer until you pay off the loan in full. Because the loan is secured against the car itself, you can lose the car if you fail to meet the repayments as agreed.
The APR on hire purchase loans can often be lower than the rates you’ll find with unsecured personal loans, so this may be a good option for those that have enough money saved to be able to cover the deposit cost. Many dealerships also offer special deals and discounts to promote particular cars and models, so it’s worth shopping around to find a rate that will suit your budget.
Because hire purchase loans are agreed between you and the dealer, they’re often faster and easier to organise than a personal loan from a bank, and can be easier to access for those with a poor credit history thanks to the secured nature of the loan.
The significant downsides of a hire purchase loans is that you won’t own the car until its fully paid off, but for many people this is a fair price to pay for a more competitive interest rate and an easier application process.
Personal Contract Plan (PCP)
A personal contract plan is another form of car finance that is arranged between the buyer and the car dealer. This type of loan is fairly similar to hire purchase plans and is also generally fast and easy to set up. The buyer pays a deposit and makes monthly payments over an agreed term, which can be arranged according to the buyer’s preference and budget. Unlike hire purchase loans, the car is not paid off in full with PCP- a substantial amount of the payment for the car is left to the very end of the contract.
At the end of the agreed term, the buyer can either pay the outstanding amount in full to gain full ownership of the car, give the car back to the dealer or trade the car in for a different model, using the remaining value of the car as a deposit.
PCP deals often hold lower deposit and repayment amounts so they can be cheaper in the short term than HP or personal loans, and dealers commonly offer low APR deals to tempt customers into PCP loans. It may also be easier to get approval on PCP finance because the dealer is able to hold ownership of the car as collateral, so buyers with poor credit can benefit from this alternative.
The primary downside of PCP is that if the buyer can’t afford to make the final repayment at the end of the term they lose the car, so in this sense PCP deals can be very similar to leasing a car. There are also often certain restrictions on buyers driving PCP cars- the dealer tends to limit the amount of miles that you can drive in the car, so this is something to keep in mind if you’re planning on racking up plenty of hours on the road.