Your car is one of the most expensive purchases that you will ever make. So, deciding how to pay for your car requires some thought. When you know what options are out there, you can start to see which method of financing suits you best. So, to help you settle on the best financing arrangement for your car, we introduce seven available options to pay for your next car.
The cheapest and safest option of paying for a car is to use your cash savings. However, not everyone has enough in the bank to pay for a car outright, which is why financing deals have become popular in recent years. However, even if you don’t have enough saved to pay for 100% of your car, you can use cash as a deposit or at least pay for a proportion of the car. For instance, if you have £7,000 in savings and are hoping to buy a car worth £10,000, you could use your savings and then take out a loan for just £3,000.
Family and friends
Although it’s not always easy to borrow money from family and friends, some of you might be lucky enough to have relatives who are willing to lend you the money to buy a car. They might not even charge you interest, but it’s important to iron out the details before agreeing to a loan from loved ones. Just remember that borrowing money from people you care about can put a strain on your relationships, so don’t make the decision lightly.
An unsecured personal loan is another potential option to pay for a car. You can apply to a lender to borrow the money you require to buy a car outright, and they agree to lend you the money. You will need to pay it back in agreed instalments (with interest) until you have paid the loan off. The biggest advantage of a personal loan is that you own the car from the outset, which is different from PCP arrangements where you need to make a balloon payment if you want to own the car at the end of the pay-back period. There are lots of personal loan lenders out there, so be sure to do your research to find favourable terms.
Although most credit cards have a credit limit of £5,000, buying a car on your credit card is a viable option for cheaper models. You need to be mindful of the amount of money you owe on your credit card, as interest rates can get out of control if you don’t make the regular payments on your account. Another thing to be aware of is that many dealers don’t accept credit cards as a form of payment, so it’s best to check their payment terms before committing to a transaction.
Personal contract purchase (PCP)
While a little more complex than a personal loan, PCPs are still a popular choice for people looking to buy a new car. Your first job is to pay the required deposit on the car, which is usually around 10% of its total value. You are then responsible for monthly payments for a period of three years. At the end of the period, you have the choice to buy the car, give it back, or take out another PCP for a new car. It’s important to note that until you make the balloon payment, the car belongs to the dealer and not to you. One positive point about PCPs is that the monthly payments tend to be lower than those required on personal loans, but you should read the terms and conditions carefully before agreeing to this type of car finance.
Similar to a PCP, a hire purchase is where you pay a deposit, followed by stipulated monthly payments. But when the payment period is over, the car is yours to keep, and you don’t need to worry about balloon payments or returning the car to the dealer. Although payments are higher than other financing options, it’s a viable option if you don’t like the idea of making a balloon payment at the end of the repayment period.
Personal contract hire (PCH)
Not to be confused with PCP, a PCH deal is essentially a long-term rental agreement where you lease a car from a dealer. Once the agreed term is over, you give the car back. Most of the time, the monthly repayments are equal to the rate of depreciation, plus interest, so they can be quite high, depending on the type of car you opt for. If you want to bounce from one new car to another, PCH financing deals are a good option, as you can simply give the car back and drive away in a brand new model at the end of the deal.
The verdict: Car financing options
As you can see, there are lots of ways to finance your upcoming car purchase. We would recommend working out which type of financing is best suited to your current situation before settling on a transaction. If you think a personal loan is right for you, check out Koyo Loans’ loan calculator, which gives you an idea of how much you can borrow to buy the car of your choice.