The Best Way to Finance a New Car

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By Crispin Bateman
Updated on Wednesday 7 August 2019

Someone putting key in car door

Other than buying property, getting a new car is likely to be the most expensive purchase you make, so making sure you do it right is important.

What’s right for one person may not be right for another, however, so here at Compare UK Quotes, we decided it was time for a definitive guide on the best way to finance a car. If you’re thinking of buying a vehicle in the near future, then look no further!

Vehicle finance – not just for cars

Vehicle finance exists for everything from motorcycles through to caravans. Throughout this article, we refer mainly to cars, but most of the information here is just as relevant for other vehicles.

What is car finance?

There are many options when it comes to funding your car purchase, but all of them are considered to be a type of car finance. Not all car finance options are the same, so it’s useful to know your exact needs before moving forward.

Why buy new?

The used car market in the UK is huge and the options are endless, so why get a brand new car when surely the best car deals in the UK are to be found on vehicles with just a few miles on the clock? There is a lot of sense in thinking that, although often, it can actually be a bit of a trap.

A used car is an unknown. Depending on the age and mileage, you could get anything from a great bargain to a complete wreck, and unless you are mechanically-minded enough yourself to do a proper survey of the car before buying it, things are bound to come up that you didn’t expect.

Brand new cars come with a level of guarantee that simply doesn’t exist in the second-hand market and they often work out considerably cheaper than older versions.

Calculating the cost of your car is very complicated, but if you add up all the costs of driving over three years, from the initial purchase through to repairs, replacement tyres, fuel and even cleaning, then adjust for depreciation and take off the amount you’d get for selling your car on, it’s possible to work out an average monthly cost of car ownership.

Staggeringly, that average monthly cost of ownership is often very similar when comparing cars in the same bracket, no matter their age.

Simply put – the extra cost you spend on monthly payments of a new car is typically only slightly more than the cost of a used car plus the repairs, poorer fuel economy and other associated costs!

Outside of the pure finances, there’s a pleasure to driving a new car that cannot be denied and, in today’s impressive world of technical advancements with vehicles, a brand-new car has a whole host of features and extras that even a five-year old alternative will be missing.

If you are in the position to be able to afford it and choose the right type of finance, a brand-new car is almost always a superior choice.

What does your credit score have to be to get car finance?

It is true that the best finance deals are only available for people with the very best credit history. At Compare UK Quotes, we have a range of articles to help you improve your credit score and recommend using CheckMyFile to keep a regular eye on your credit status to keep it under control.

“Will I qualify for car finance?” is the number one worry that often has people turn away from some of the better options even before they’ve tried. Don’t let your credit score rule you, but instead take control and build it up. If it means waiting a few months before getting the car you really want, then that’s a few months worth waiting.

Of course, when you finance a new car, you also provide yourself with another opportunity to improve your credit rating. Regularly monthly payments are going to boost your score and open the doors to other forms of credit. Just make sure you don’t slip up and cause the opposite to happen.

Car finance option #1 – buying the car outright

Admittedly, this option is not available for many people, but if you have the savings available to buy the car outright (and still have a little left over for emergencies) then this is far and away the best way to buy a car for most people.

While you lose any interest your savings were gaining, that amount is going to be considerably less than the interest you would pay on any of the other car financing options. It generally makes the best financial sense, though it’s not necessarily always right.

A few reasons against it include:

  • That money could be better used elsewhere where finance isn’t an option – for example, as a deposit on a property or investment into a new business.

  • You would’t leave enough behind to feel secure – if your savings are a large part of your mental and emotional security, then their sudden loss is often more of a hit than simply taking out an alternative car finance deal.

  • It doesn’t help build your credit history – a one-off payment from your savings will do nothing to improve your credit score, whereas paying monthly will show many months of good financial management.

Car finance option #2 – buying a car using a personal loan

The practicality of using an unsecured personal loan depends a lot on your previous credit history. For those with impressive credit scores, it is likely that the rate of interest offered with a personal loan will be lower than other forms of finance; however, if your credit score is mediocre then the terms of any unsecured personal loan are likely to be inferior to other options – plus, you simply might not qualify.

A personal loan will take a day or two before the money is available in your account, but then you can simply go car shopping with the knowledge that you have the cash available to pay for it.

One other advantage is that you could take out a slightly larger loan than needed for the car, giving you an extra bit of money to use at the same time.

Be aware that unsecured personal loan terms mean that monthly payments are likely to be higher than other options and you will be buying the car outright without any upgrade or return options that are available on other finance cars.

Remember too, that an unsecured personal loan is not limited to your usual bank. Other options do exist, such as peer-to-peer lending and other online lending, and you may be able to find a very competitive deal. Remember to shop around and don’t simply accept whatever loan you find first.

For more information on personal loans, read our guide here.

How do you get a car loan? The process: step-by-step

  1. Prepare for this by improving your credit score before applying for a loan. This will increase your chances of receiving the best loans with the lowest interest rates.

  2. Use credit checking websites, which often include built-in credit eligibility tools, to find out what loans you’re most likely to be accepted for. Remember, if a provider rejects your credit application, it has a negative impact on your credit status and it’ll become all the more difficult to get credit in the future.

  3. Shop around online (or using a credit broker, bank or building society) to compare the various providers and loans available for you. Be sure to look for the loan with the best representative APR.

  4. Agree terms – such as the length and interest rates – with the loan provider and sign on the dotted line. The longer you give yourself to pay back your loan, the lower monthly payments are in most cases. Only take out loans you know you’ll definitely be able to pay them back comfortably!

Car finance option #3 – buying a car using a property-secured loan (remortgage)

With a very low rate of interest, using a remortgage to get the money needed for a car can seem like a good idea, but do remember that the interest is low but the repayment period is long, so overall, you might end up paying more interest on the loan compared with all the other options. A remortgage will also take longer than other options to set up, so if time is a factor it’s unlikely to be the right choice.

Using your house to secure your loan also puts it at risk if you cannot make payments.

One of the great advantages of using a remortgage as a car financing option, however, is the low monthly repayment. If your monthly budgeting is tight and you own your home then this may be the option for you.

Car finance option #4 - hire purchase (HP)

Hire purchase is one of the most common ways of getting a car loan in the UK today and has been part of the system for many decades.

With HP, you pay a deposit (typically 10% of the car’s value) and then you make regular monthly payments in full until the remainder of the loan is paid off. Some (but not all) HP deals work with a large final balloon payment to keep the monthly payments low, whereas others simply spread the total cost across the monthly payments.

There are some things worth understanding with HP deals:

  • You do not own the car until the final payment is made

  • The loan is secured on the car, so a failure to make payments can result in you losing it

  • Hire purchase cars can work out more expensive than other shorter-term options

There are also some good pros:

  • Interest rates are generally very competitive

  • Being secured on the car means there’s a more relaxed attitude to poor credit scores

  • Very quick to arrange and set up and can usually be done at the dealership with no prior discussions with lenders

  • Available on used cars as well as brand-new ones

  • Deposit is lower than some other options

  • Flexible with repayment terms (up to 60 months) so easier to budget around

If you plan from the outset to keep the car and want a simple agreement, hire purchase is often the right choice.

Car finance option #5 – personal contract purchase (PCP)

Personal contract purchase is a flexible option for buying a car on finance and remains one of the smartest ways to buy a car as a consequence.

The way PCP works feels similar to HP, but it works quite differently. Your loan is actually a far smaller loan than an HP equivalent because it only covers the depreciation of the car over the loan term.

Essentially, it is calculated as the difference between the value of the car when new and the expected value of resale at the end of the term. You then pay monthly payments on this smaller loan and at the end of the term, you are able to make one of three choices:

  • Return the car to the dealership

  • Pay a pre-agreed balloon payment that equates closely to the current value of the car and keep it

  • Upgrade to a different car and start the process again

The second option can feel a lot like a HP agreement with a final balloon payment, but because of the early flexibility, it will end up a little more expensive than if you had chosen HP initially.

Like hire purchase, the dealership retains ownership of the car, and, also like HP, the loan is secured on the car, so a failure to make payments can lead to you losing the vehicle.

PCP‘s low monthly payments coupled with the flexibility of not having to make a long term decision until the end of the contract mean PCP suits many families.

The overall interest rate is typically a little higher than hire purchase, but the loan has the same secured nature and so is more forgiving with a poorer credit score.

One of the biggest differences between PCP and HP is in the terms regarding the car’s condition. Often, the car is returned to the dealership at the end of the contract, it is treated very similarly to a lease agreement and you will have a cap on your annual mileage and additional fees should you damage the car beyond reasonable wear and tear.

Personal contract purchase bridges the gap between car ownership and a full lease.

Car finance option #6 – personal contract hire (PCH) and leasing

Is it a good idea to buy a car on finance or should you simply lease it? At Compare UK Quotes, we are strong advocates of the idea of leasing your car. It’s not for everyone, but the advantages are so compelling that it often rises to the top of the pack.

First of all, it is important to understand that under personal contract hire, you do not own the car -and you never will. A lease is a long-term hiring agreement and you will have to give the car back in good condition at the end of the contract.

With PCH, you make a single deposit payment (typically 3x to 6x the size of a monthly payment) and then make regular monthly payments to the finance company while you use the car. The contract is for a set term (usually three to four or five years, though shorter periods are available, right down to a few months) and once completed, you can upgrade your car effortlessly to a newer model or alternative. It is important to note that you must be able to complete the term, as ending a lease early can be difficult and incur charges.

Because lease companies are keen to keep their cars in prime working order, there are maintenance contracts that can be purchased alongside your lease, which takes the cost and worry of looking after them away entirely. This means that budgeting with a lease car is far simpler than any other option – even buying outright!

The downside of leasing comes to having a fixed mileage limit (though you can go over it if you are happy to pay the penalties) and needing to keep the vehicle well looked after - though, if looking after your car isn’t on your plans anyway, perhaps a brand-new vehicle isn’t for you!

The overall monthly cost of leasing is higher than HP or PCP because you do pay for the support you receive, especially when maintenance and repairs are considered, but it is a fixed rate which means you will always know how much your car is costing you. There are no hidden costs and no surprise bills.

Of all the car finance options, however, personal contract hire is the one that will expect the finest credit report. If your credit score is below average, then it’s unlikely you’ll be able to get a lease contract.

At Compare UK Quotes, we like to direct you to reputable companies we’ve worked with, and when it comes to personal contract hire, we recommend Complete Leasing. They have a huge amount of advice regarding leasing and some of the best car finance deals available in the UK – why not take a look?

Car finance option #7 – using a credit card to buy a car

We’ve got many articles on credit card guides in the Compare UK Quotes library, so we know just how varied credit cards can be, but if you do have the available credit on your card to finance a car, is it a viable option?

Ultimately, yes, though you need to take some things into account:

  • You should expect the interest rate on your credit card to be higher than many of the other options here, but clever use of 0% purchase cards and later juggling with balance transfer cards can mean you end up clearing the debt never having racked up a penny of interest. Your experience and care is going to play a large part in determining the financial value of using a credit card.

  • Some dealerships won’t take a credit card. It’s worth asking early on to avoid disappointment.

  • You are likely to be hit with a credit card handling fee of up to 3%.

  • Extending your credit to this amount on a credit card could impact your other credit applications for months.

Of course, there are bonuses too:

  • Any reward points (Avios, Nectar etc.) or cashback offers are going to be valuable with a purchase of this size.

  • You will be entitled to credit card protection.

  • You do not have to wait for a decision regarding additional lines of credit.

  • Repayment is in your terms as long as you meet the minimum repayment levels for your card.

  • The car is instantly yours in full.

Using a credit card to buy a brand-new car is rare, but certainly not unheard of.

GAP insurance when buying cars on finance

If you have a loan out on your car then it is imperative that you also purchase Guaranteed Asset Protection alongside it.

GAP insurance, mainly taken out when leasing a vehicle, covers the difference between the market value of your car that will be paid by an insurer should an accident occur, and the amount remaining on any loan to the finance company – without it you could find yourself owing thousands and having no car to show for it!

For more on GAP insurance, read our guides here:

Finding the best car finance deals

When buying a new car, like with anything else, you should be prepared to put in research and really shop around for the best options before diving ahead – and that’s not just about finding the best price for the car itself, but also the best deals in the finance options. Different lenders will offer different rates, so don’t just take the first deal you see.

Is it better to finance a car through a bank or dealership?

The dealership has a captive audience – you are there, you’ve test driven the car, you can smell the lovely interior and all you have to do is sign! It’s easy to be drawn in and accept their finance deal, but you are better off stepping back and seeing what other options are available.

Go online and look at your bank (and other banks) to see what rate you might get on a personal loan, or even go directly to a specialist car finance company and see if they will offer you a superior rate.

That said, the dealership might well be the best option, so don’t reject them out of hand!

Finance advice with Compare UK Quotes

Is it better to finance a car or simply buy a car outright? We hope that this article has helped you answer that question. If you need more information on personal loans, car leasing or anything else covered in this article then look to our extensive library for more in-depth information.

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