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What is the best way to pay for a new car?

Buying a new car is exciting but deciding how to pay for your new pride and joy can be tricky. Here is how to find the best way to finance a car.

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It can be tricky trying to figure out you to pay for a new car. Whether you should do a personal contract purchase (PCP) or buying outright may be a better option.

Buying outright with cash

There are several advantages to using your savings and simply pay for the car with cash.

  • You won't be indebted to anyone

  • You own the car outright straight away

  • You won't be charged interest

  • You avoid credit card charges

  • You won't have expensive repayments to make each month

What are you sacrificing?

Before stumping up the cash weigh up whether spending your savings is really the best choice. Consider:

  • Do you have the savings earmarked for anything else?

  • Would you cope financially if something went wrong with no savings?

  • Do you have access to credit if needed?

You also need to consider any loss of interest, and, if your cash is deposited in an ISA, loss of your tax free status that your savings are currently benefiting from.

Cash is the cheapest option because you avoid interest. However, low rates and 0% finance deals mean borrowing may not be as expensive as you think either.

Get a discount

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.

Personal Contract Purchase (PCP)

PCP agreements have soared in popularity, you pay a deposit then a fixed number of monthly repayments - usually over 2-4 years. At the end of your PCP you can either:

  • Hand the car back and walk away

  • Pay a final lump sum to purchase the vehicle outright

  • Part-exchange the car for a new one using any equity

PCP plans tend to offer lower monthly payments than personal loans or hire purchase plans, but you never actually own your car until you pay the final lump sum.

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.

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 from the dealership really make it worthwhile.

Think about your miles

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.

Hire Purchase Plans

With a hire purchase plan you pay a deposit and spread the cost of the rest of the car over a fixed period, usually two to five years.

You don't actually own your vehicle outright until the final payment is made, but during this time the manufacturer is jointly responsible for fixing any problems.

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.

Personal loans

Using a personal loan to pay for your new car has several advantages:

  • Set monthly payments make it easy to budget

  • You can pay for your car upfront in full and own it straightaway

  • Your borrowing is not directly associated to your vehicle

  • You can choose the loan term

The cost of personal loans has also fallen in recent years so they are a cheaper choice than they once were.

Getting the best loan

The main cost of your loan is set by the interest rate so choose the cheapest option, although you should also weigh up if you need the flexibility to repay early before you apply.

Compare the market leading personal loans together using our loan comparison table.

Compare personal loans

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 could be very expensive.

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.

Compare bad credit loans

Credit cards

Using a credit card to buy your new car can be a cost effective way of getting a new set of wheels and will allow you to buy your car outright on the day.

You need to use the right credit card to avoid hefty interest charges and make sure you have a sufficient credit limit to cover the full purchase. You have 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.

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.

Car insurance is just one of the costs of keeping your car on the road along with tax, petrol and servicing, so cut your insurance costs by comparing the best deals for you.

About Martin Lane

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