With most new cars costing tens of thousands of pounds, finding the cheapest way to pay for your car is vital!
If you have enough savings in the bank to pay for your new car outright, you could save a significant amount by paying with cash and avoid using finance to purchase your car all together.
There are several advantages to using your savings: you won't be indebted to anyone, will own the car outright straight away, you won't be charged interest, you avoid credit card charges and won't have expensive repayments to make each month.
What exactly are you sacrificing?
Before stumping up the cash you need to weigh up whether spending your savings is really the best choice. Consider:
If you can pay in cash you'll be in a good position to push for a discount. Most car dealerships will recognise that cash buyers will expect a discount and will be ready to reduce their prices.
Do you have the savings earmarked for anything else?
How would you cope financially should something go wrong without your savings?
Do you have access to credit if needed?
You also need to consider any loss of interest, and, if your cash in deposited in an ISA, loss of your tax free status that your savings are currently benefiting from.
Using a personal loan to pay for your new car has a number of advantages: set monthly repayments will make it easy for you to budget, you'll be able to pay for your car upfront in full and your borrowing won't be directly associated to your vehicle.
You will also have the flexibility to decide on the length of your loan and as the cost of personal loans has also fallen in recent years they are also a more cost effective choice than they once were.
Getting the best loan
The main cost of your loan will be set by the interest rate or APR so choose the cheapest option, although you should also weigh up if you need the flexibility to repay early before you apply.
But what if you have a poor credit rating?
If you have a poor credit rating, using a personal loan to buy your new car will in all likelihood be very expensive.
While you shouldn't rule out the prospect of using a personal loan from the offset, you should carefully compare the cost of a loan with your other finance options.
You can use our bad credit loans comparison table to get an idea of the potential cost of a loan, although you won't know exactly how much you'll be charged until you get a quote.
You can get an idea by asking each lender for a cost illustration before you apply - this isn't the same as a quote because it won't show up on your credit history and while it's not definitive it should give you some idea of the cost.
Using a credit card to buy your new car can be a surprisingly cost effective way of getting a new set of wheels and like a loan will allow you to buy your car outright on the day.
Of course making sure you use the right credit card is essential to avoid hefty interest charges. You will also need to ensure you have a sufficient credit limit to cover the full purchase, which may be a problem if you're buying a larger vehicle. There are a couple of options:
Use a 0% purchase credit card to pay for the car outright and then split the repayments over the interest free period so the balance is cleared by the time you're due to be charged interest.
Pay on a cashback or rewards credit card and then either use savings or a 0% balance transfer to pay off the amount in full before interest is added.
You may be charged a credit card fee on the transaction so check this when you compare your options and make sure you still win by choosing this payment option.
Flexibility - A good or bad thing?
One of the big advantages of using a credit card is the greater flexibility it offers over how much you repay and when.
This makes a credit card an ideal choice if you need the freedom to vary the amount you pay off from month to month.
However, this freedom can also be a drawback, if you only repay the minimum repayment each month it will take you much longer to repay your borrowing.
Car dealership finance plans
Car dealership plans can be a mixed bag, while total cost and interest rates are less competitive; they often come with other sweeteners and discounts which can make them worth looking at.
Personal Contract Purchase (PCP)
Plans PCP agreements have soared in popularity in recent years and involve paying a deposit followed by a fixed number of monthly repayments (usually over 2-4 years).
At the end of your PCP you have the choice to either:
Hand the car back and walk away
Pay a final lump sum payment to purchase the vehicle outright (a Guaranteed Future Value payment)
Part-exchange the car for a new one using any equity
One of the main attractions of a PCP plan is the lower monthly repayments compared to using a personal loan or hire purchase plan, however the reason they are lower is due to the larger final payment and that you never actually own your car until it is paid off.
This "guaranteed final payment" is the estimated value of the car at the end of your PCP plan and is calculated using your planned mileage figures - once it's set it can't be changed.
Be as accurate as possible with your estimated mileage, too low and you you'll be charged around 10p/mile at the end of the term, aim too high and you'll be increasing your monthly repayments unnecessarily.
PCP plans are attractive if you want to change your car every 2-3 years, as you have the option to hand the car back, avoid MOT, servicing and repair costs that often begin to crop up after the first 3 years.
However, if you plan on keeping your car you need to do some cold hard maths to check that any discounts or incentives on offer from the dealership really do make any PCP plan cheaper than financing the purchase by other means.
Hire Purchase Plans
A hire purchase plan is arguably the simplest dealership finance plan. Like a mortgage on your home, you agree to pay an initial deposit (usually 10-15%) and then spread the cost of the rest of the car over a fixed period (usually 2-5 years) until the whole balance is repaid.
Under the terms of a hire purchase plan you don't actually own your vehicle outright until the final payment is made.
However, during this time they will be jointly responsible for fixing any problems, giving you some recourse if something goes wrong.
Purchasing a car using hire purchase can often be done with little upfront cash (the deposit is often paid by the retailer) making them an attractive option if you want to spread the cost and don't have access to cheap credit.
However the monthly repayments will often be higher the PCP plans, meaning you may not be able to afford as expensive a car as you would if you went with a PCP.
The main cost of a hire purchase is set by the interest rate, this is charged on your outstanding balance and is often higher for agreements with little or no cash deposit.
There are a couple of other plans dealerships can offer including:
Lease Purchase Plans: A lease purchase plan is very similar to a PCP except that the dealerships do not guarantee the final value of your new car at the end of the agreement. This means that after paying fixed repayments for an agreed term you will need to pay a final lump sum (balloon payment) to own the car.
Personal Contract Hire Plans: A personal contract hire plan is in most cases designed for business customers who want to drive a new car without ever owning the vehicle. A PCH plan will involve fixed monthly repayments based upon mileage over a pre agreed amount of time.
The interest rate you pay and your ability to get any of these finance plans from a dealership will usually be 'subject to status'. This means that your eligibility will depend on your credit history and perceived ability to repay. For this reason it's a good idea to check your credit rating before you apply just as you would with any other financial product.
What else should you consider?
Before you make your final decision you need to be confident that you can afford your choice, both now and for the duration of your finance agreement.
Don't forget to factor in your running costs in your calculations, including car insurance, tax and fuel. If you're unsure, reconsider your options; perhaps look at a lower spec car or a smaller engine.
Buying new undoubtedly comes at a cost and you could save up to 30% off the purchase price just by going second hand.