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What types of finance are available?

The cheapest way to buy a car is to buy it outright without borrowing money. If you can save a regular amount and only make the purchase when you’ve built up enough money, then you won’t pay a penny in interest. Sometimes that’s not an option, however, in which case you can consider car finance. Car finance is the process of funding a vehicle purchase over a set period of time.

If however you do need to borrow in order to purchase your next car, then remember that in general terms, the more you borrow, and the longer the period over which you borrow it, the more you’ll end up paying in interest. If you can afford to, make part of the payment using your own money in order to reduce the amount you need to borrow.

If you aren’t buying a car outright with cash, then there are a few different ways to fund your purchase. Here are some popular options:

• Personal loan
• Credit card
• Hire purchase
• Personal contract purchase

A broker, such as Zuto, can quickly provide personalised quotes for different forms of vehicle finance based on your answers to a few simple questions.

Buying with a personal loan

Personal loans are available from a range of lenders – including banks, building societies and supermarkets. Personal loans are generally available over terms between one and seven years. Each lender will have its own interest rates, fee structures and amounts available. If you apply for a personal loan, the lender will look at factors like your income, expenditure and credit score when deciding whether or not to approve the loan. Once approved the funds are transferred to your account and you’re free to make your purchase.

Pros and cons

Buying with a credit card

If you’re approved for a credit limit that covers the purchase of the car you’re after, and you’ve compared credit cards to find a lengthy 0% on purchases deal, then using a credit card can be a smart way to buy a car. As an added bonus, credit card providers are obliged to give protection on credit card payments between £100 and £30,000.

The downside is that if you don’t pay off the debt within the 0% period, the rate is likely to revert to something far less competitive than a standard loan. Because you’re only obliged to make the minimum monthly payment, you’ll want to work out how much you need to pay each month in order to clear the debt before any offer period on the card expires. Additionally, if you’re worried you’d be tempted to make further purchases on the card, then this might not be the smartest option for you.

Pros and cons

Compare 0% purchase credit cards

Buying on hire purchase (HP)

If you opt for hire purchase, you’ll generally be expected to pay a minimum of 10% of the vehicle’s value upfront, and you’ll then pay the remainder off over one to five years. The credit is secured against the car, so if you fail to keep up repayments you stand to lose the car.

Hire purchase agreements are normally arranged by the dealership. This means they’re quick and easy to sort out. However it also means that they tend to be more competitive when you’re buying one of their new cars, as opposed to a used car.

Pros and cons

Buying using personal contract purchase (PCP)

With personal contract purchase (PCP) you essentially take out a loan for the difference between the current value of the car, and the projected value of the car at the end of an agreed period (generally one to four years). You’ll make monthly payments, and then at the end of the agreed period you can make a balloon payment to purchase the car outright.

PCP’s are arranged so that at the end of the agreed period, the car should be worth a little more than the balloon payment you would have to make to buy it outright. You can’t claim this back as cash and walk away, however – at the end of the agreed period you have three options:

• Make a one-off balloon payment to purchase the car outright.
  If you like the car and don’t want to switch, this could be a smart choice.
• Hand the car back and walk away.
  If you can’t afford the balloon payment, and you’re not keen to enter into a new PCP this is probably what you’d do. If the value of the car has decreased more than expected, and it’s actually worth less than the projected amount, then provided this isn’t due to damage or excess mileage, you’d generally hand the car back and walk away.
• Trade the car in and enter into a new personal contract purchase.
  This is a popular option if the car is worth more than the balloon payment you’d need to make to buy it outright. You can put this ‘equity’ towards a deposit on another PCP.

When you enter into a PCP, you’ll be asked what mileage you expect to clock up in the vehicle. It’s important to answer this honestly, otherwise, you’ll find yourself in a weaker position at the end of the PCP. Bear in mind that if you damage the car or exceed the agreed mileage limit there will be charges to pay at the end of the agreed period.

The credit is secured against the car, so if you fail to keep up repayments you stand to lose the car.

Pros and cons

How do I find the best car loan?

The best car loan for you will depend on your specific situation, but here are some of the important questions to ask before settling on a particular loan product.

• Am I eligible? There’s no point in applying for a loan if you don’t meet the lender’s minimum requirements. Find these requirements on the lender’s website or in online reviews.
• How much can I borrow? Does the lender offer loans that cover the total cost of a car you’re interested in — and can afford?
• Are the interest rates competitive? A high minimum advertised interest rate isn’t the best sign, and a refusal to disclose interest rates can be even worse. It could mean that rates are so high, that the lenders would rather not advertise them.
• What are the fees? On top of dealership and state fees associated with buying a car, some lenders charge fees for taking out a loan.
• How long are the loan terms? Does your lender offer terms you can afford after you factor in APR and other costs involved in getting a new car?
• What’s the deposit? A 10% deposit is standard, but some lenders charge more. Go for a lender that offers a deposit that fits your budget.
• What are the early-repayment terms? Paying your loan off early can save you money on interest. However many lenders will charge a fee, for example one month’s interest, if you wish to repay your loan early. With each of the finance options listed here, you should make sure to find out the early-repayment terms of the product that you’re considering.
• How’s its online reputation? Quickly scan online forums and review sites to see what people say about each lender. Are interest rates high? Do people have trouble making repayments? If anything sounds sneaky, run.
• What services does it offer? Some lenders hold your hand throughout the process of getting financing, and others don’t. Consider the help if you don’t know what you’re doing — but also ask: Is the lender genuinely helpful or just pushing you into your partners’ laps.