Buying a car on finance

By Joe Marczynski
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Trying to figure out the best way to finance a car? Start here and take the stress out of getting a car on finance.

If paying for a new car with savings isn’t an option for you, we sympathise. Cars are a hefty expense and a hit to anyone’s wallet. However, there is a further option; getting a car on finance. ?

The best way to buy a car on finance

There is no one best way to finance a car. Instead, it depends on factors such as how much you need to drive it, how clean you think you can keep it, and whether you want to give it back at the end. It also depends on how long you want the car for, and how long you need to pay it off.

These are your options:

Hire purchase

There is the option of hire purchase, commonly abbreviated to HP.

HP basically means that you put a deposit down on a new car and drive it away with the agreement that you’ll keep paying off the balance of the car over a set period of time. Only when you’ve made your very last payment will you own the car. If you pull it off successfully, it can have the bonus of improving your credit score, and you finish up with your very own car.

However, you need to prepare properly; fail to meet payments and you could lose the car, as the finance company involved may retain the right to reclaim the car if payments are missed or late. Be aware also that the interest you’ll pay is likely to be high.

Personal Contract Purchases

Commonly known as PCPs, a personal contract purchase gives you more flexibility than a hire purchase. You pay a deposit and instalments over a set period – like a hire purchase – but a big chunk of the payment isn’t required until the period ends.

At this point, you have three options:

- If you want to keep the car, you have to pay that lump sum off.

- If you don’t want to keep the car, you just return it to its rightful owner.

- Alternatively, you can sell it privately, and use the cash you raise from that sale to pay off the lump sum owed.

PCP's are a great option if you always keep your car in great condition anyway, and your circumstances are unlikely to change in the future. This is because you will agree a set maximum mileage as part of the contract, and this can’t be exceeded. ?

Personal leasing

If you’re 100% sure that you won’t want to keep the car at the end of your contract, personal leasing may well be your best bet. You set up an agreement to pay a fixed monthly amount for the car, and once that agreement is up, you return the car. You don’t own the car, but that means that you don’t need to worry about things like car depreciation.

Personal loan

Unlike the above options, which are done through car dealerships and garages, a personal loan is done through a bank, building society or general finance provider. You’ll need a sturdy credit rating to get one, however, and will need to invest sometime in finding the best APR. This stands for annual percentage rate, and incorporates both the interest you’ll pay on your loan, plus other fees and charges often tacked on. ?

Is buying a car on finance cost effective?

Buying or leasing a car on finance is simply never going to be as good a deal as buying in cash.

There are always going to be fees involved, whether that’s deposits, interest rates or even fines for breaking the rules of your contract.

To make the process as cost effective as possible, shop around for the best deal. Figure out what it is you need from your finance package, for starters. If you definitely want to keep the car at the end for example, personal leasing is out of the question. If you had a poor credit rating, a large bank loan is also unlikely to be an option. Once you’ve eliminated the no-go options in this way, weigh up whatever remains, in particular, look out for deals that will cost you the least in the long run. ?

Take your time

Don’t get rushed into making a commitment. Some dealerships might try and convince you that their package is the best on the market, but don’t take their word for it right away. A bit of research could save you hundreds, perhaps even thousands.

Make sure you have the funds

When buying a car on finance, you have to enter into a legally binding agreement with a company or organisation. As with any contract, you must be sure that you can uphold your end of the bargain. Be totally sure that you can afford any repayments or fees that are due.

Put a back-up plan in place too; if you were to lose your job, for example, where would the funds come from? Or if you needed to give the car back, would you be able to access the fee for early access?

You also need to be sure that you can afford to run and maintain the car itself, including potentially high expenses like MOTs, insurance and breakdown cover.

Making a clear, well-structured plan will serve you well in the long run. ?

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Representative example for a loan of £4,000 for 24 months at an interest rate of 15.5% APR fixed. In this example the total amount payable (including interest and fees) would be £4633.57 and your monthly repayments would be £193.07.

giffgaff receives a fee for introducing personal loans to Retail Money Markets Ltd trading as Ratesetter.

giffgaff gameplan is a trading style of giffgaff Limited, we are a credit broker and not a lender and introduce loan applications to its selected provider of loans Retail Money Market Limited trading as Ratesetter. Terms and conditions apply. Finance subject to status. 18s and over. Credit is provided by Retail Money Market Limited trading as Ratesetter, 6th Floor, 55 Bishopsgate, London EC2N 3AS Ratesetter is authorised and regulated by the Financial Conduct Authority – Firm Reference Number 633741

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