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Car finance and loans

Car finance and loans

From car finance deals to personal loans and credit cards, there are plenty of funding options when it comes to buying a car.

Main car finance options

No single option is right for everyone, but if you're at the dealer you may be offered dealer loans, hire purchase and Personal Contract Purchase choices.

Extend your search for options, though, and consider leasing, paying cash, taking out a personal loan, using a credit card and/or remortgaging.

Once you've decided you want to buy a new car and worked out which one you want, there's one more big decision to make - how you're going to pay for such a major purchase.

There are a multitude of finance options available, from those offered at the car dealership, to choices like personal loans, credit cards or even cash.

For any type of finance, to get the very best deals you'll need a decent credit history, so it's a good idea to find out more about how credit checks are made.

The finance option you choose can make a big difference to how much you pay overall for your car, so you should do some calculations and work out what suits you the best rather than just choosing an option with attractively low monthly payments.

There's no point haggling a few hundred pounds off the price of a car if you end up paying even more than that in interest and fees by choosing the wrong finance product.

Car finance offered at the car dealer Cutting the cost of loans

Whether you buy a new or used vehicle, your chosen car dealer is likely to push their own finance deals.

There are a number of different types of product available, so it's important to understand what's being offered.

Although the following types of finance are generally sold though car dealerships, there are also brokers and providers that offer these products independently, then arrange to pay the finance money directly to your chosen car dealer.

Rather than just going for the finance offered by your chosen car dealer, check whether you can get a more competitive rate elsewhere - you can use our loan comparison tool to compare both general personal loans and car-specific finance (accessed by clicking 'apply more filters' then selecting 'car').

Car loans from dealers

Pros & cons of dealer loans

  • You'll own the car outright
  • Convenient to arrange BUT...
  • Best rates need a good credit score
  • Better deals may be available

The simplest finance offered by car dealers is a straightforward car loan, which is essentially just a personal loan.

If you want to own the car outright by taking a loan of this type, it's important you compare the rate the car dealer is offering against other personal loans you could apply for elsewhere, as you might be able to get a better deal - don't just settle for dealer finance for the sake of convenience.

Be aware that whether you choose your car dealer's loan option or a personal loan elsewhere, the rate you'll be offered will depend on how your credit history is rated.

This means that you might not get the advertised APR and you won't know what rate you'll be offered until you apply. A soft search facility such as that used by Gocompare.com can give you a better idea of the loans you'll be accepted for before you apply.

Hire purchase deals for cars

Hire purchase deals are where the finance company 'buys' the car and takes it as security, meaning that the car isn't technically yours until the loan is repaid in full.

Pros & cons of hire purchase

  • Large loans available
  • Convenient to arrange BUT...
  • Car can be repossessed if you miss payments
  • You don't own the vehicle - and usually can't sell it - until the loan's been repaid

You usually put down a deposit, typically of 10%, and the remaining cost of the car plus interest is paid in monthly instalments for the duration of the loan.

One big advantage of a hire purchase deal is that you may be able to get a much larger loan for an expensive new vehicle than the £25,000 you'd usually be able to get with a standard car loan or personal loan.

Because hire purchase loans are secured against the car, they often cover as much as £50,000 or maybe more, allowing you to finance the most expensive vehicles, providing you meet the lender's other conditions.

However, if your car loan's secured against the vehicle, your car could be repossessed by the lender if you fall behind on payments.

You should also be aware that hire purchase deals often require you to have comprehensive car insurance. Car insurance groups

Although you may be offered a hire purchase option by the car dealer, you may find you get a better option by comparing personal loan rates instead.

Note that, if you're looking at cars costing less than £25,000, a personal loan won't be secured against your vehicle.

Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) is most often offered on brand new vehicles, but it's sometimes available on used cars as well.

Pros & cons of PCP

  • Can change cars every few years
  • Low monthly payments BUT...
  • Mileage limits apply
  • At the end of the deal you've only paid off the car's depreciation

It can be similar to hire purchase in that the finance company buys the car and you pay a deposit followed by monthly instalments. However, you only need to pay off a portion of the borrowing.

Payments are likely to be lower and repayment terms shorter than a hire purchase agreement, so it can seem like an attractive option to those on tighter monthly budgets.

At the outset of the agreement, the finance company will give the car a guaranteed final value (GFV), which will depend on your deposit, your monthly instalments and your annual mileage.

Subject to meeting the mileage and other conditions such as regular servicing, the finance company is guaranteeing that the car will be worth at least the outstanding balance remaining on finance at the end of your PCP term.

At the end of the agreement, you have three options:

  • Make a payment equalling the GFV - called a balloon payment - to take full ownership of the car
  • Hand the car back to settle the remaining finance
  • If the car is actually worth more than the GFV figure at the end of the term, use the difference in value as a deposit towards another car

For instance, let's say you're given a GFV of £5,000 but at the end of your PCP term the car is worth £6,000.

You could pay £5,000 to take ownership, hand the car back and walk away, or trade the vehicle in, using the extra £1,000 as a deposit on another car.

If the same car is only worth £4,000 at the end of the term, you could again pay £5,000 to take ownership, or you could hand it back and walk away without paying any extra - but this would mean you wouldn't have a deposit for your next car.

Note also that when you take a PCP deal you agree to a maximum annual mileage. The higher the mileage, the more you're likely to have to pay for your PCP deal.

If you exceed the mileage, a fee for every mile you've gone over by will be added to the GFV.

Gap insurance

If you write off your new car or it gets stolen before you've repaid the finance, the insurance payout might not be enough to repay the finance company what you owe - that's where Guaranteed Asset Protection (Gap) insurance can come in.

Gap insurance covers you for the difference between what the insurance company pays out and what you still owe on the car, so it might be worth considering if you've taken out car finance.

So, if you exceed your agreed mileage by 1,000 miles and you've agreed to pay 15p for each extra mile, you'll have to pay an extra £150.

If you plan to buy the car outright at the end of the PCP deal, there might well be less expensive ways to car ownership, so it's important to calculate the cost of the deposit, GFV and monthly payments added together.

When you look at the overall cost, you might find that a personal loan saves you money over the full term.

However, PCP is popular with people who want a new car every few years and who are happy to pay monthly instalments without ever actually owning the car outright.

Often, you'll only really be paying off the car's depreciation with a PCP deal, so you may find you have no equity in the car at the end of the deal, and therefore don't have a deposit for your next car.

Car finance options away from the dealer

Personal leasing of cars

Personal leasing deals are an alternative to car ownership where you basically hire the car long-term, then simply hand it back at the end of the agreement.

There are brokers dealing in leasing deals on used cars, but personal leasing is most common on new vehicles.

It often includes servicing agreements and sometimes even insurance and tax, which may allow you to just make a payment each month and get on with motoring.

Of course, you'll have no paid-off car to show for it at the end of the agreement and monthly payments can be high, especially if servicing, tax and insurance are all thrown in.

Paying cash for a car

Pros & cons of paying cash

  • No credit check
  • You may get a discount
  • You'll own the car outright BUT...
  • Need to pay in full at time of purchase

Handing over a handful of readies or making a bank transfer is by far the simplest option for buying a new motor.

What's more, it puts you in a strong position to negotiate a discount and, if you're picking up a second-hand vehicle in a private sale, it may well be your only way to pay.

If you can afford to slam down your debit card at a car lot to pay outright for a brand new motor, you'll be protected by the dealer's usual warranties if anything goes wrong.

If you're buying a used car, however, remember that in most cases they're 'sold as seen' and once you've signed the logbook and handed over a wodge of twenties, you'll have little recourse if there's a problem with the car.

If you've bought from a used car dealer they may well offer their own warranty, perhaps of a month or three months, so you'll have some protection against problems that weren't pointed out at the time of sale.

Pros & cons of personal loans

  • Rates can be competitive
  • You'll own the car outright BUT...
  • Usually limited to £25,000
  • You'll need a good credit score to get the best rates

Using a personal loan to buy a car

Getting a personal loan to cover the cost of your car purchase can be convenient and cost effective, with advertised APRs often far lower than car finance rates.

There's one major proviso, though - the advertised APRs on personal loans only have to be offered to 51% of those who are accepted.

This means that you might be accepted for a personal loan but only at a rate that's much higher than the advertised one.

You may also find that, to get the best rates, you have to borrow a larger amount than you actually need.

If you're only trying to fund a relatively small second-hand purchase, a different option such as a 0% credit card might be a cheaper way of doing it.

On the other hand, if you're after a luxurious new car, bear in mind that most personal loans are for a maximum of £25,000, so if your dream vehicle cost more than that you might be limited to car-specific finance.

If you compare loans through Gocompare.com, you may find that some of the deals with the most attractive advertised rates are the peer-to-peer options.

Peer-to-peer loans cut out the middleman (the bank) from the equation, allowing borrowers to get more competitive rates directly from lenders.

As with standard personal loans, though, only those with decent credit scores will get the headline APR.

Using a credit card to buy a car

Pros & cons of credit cards

  • A 0% card could work as an interest-free loan
  • You can repay early without penalty
  • Consumer Credit Act protection
  • You'll own the car outright BUT...
  • You'll need a good credit score to get the best rates and sufficient credit limit
  • Interest might be high if you don't clear the debt before 0% deal ends
  • Car dealers may charge a credit card fee, private sellers and some dealers may not accept credit cards

Using a credit card could be one of the cheapest or one of the most expensive ways to pay for a new car, depending on the type of card you use.

You may want to think about applying for a 0% purchase credit card before going car shopping.

If your credit limit will cover the cost of your chosen car, you'll be able to spread the payments over the term of the 0% deal and treat it like an interest-free loan.

One word of caution, though - many car dealers charge a credit card transaction fee of around 1-3%, so you have to factor this into the cost of your purchase.

On a £7,000 car a 3% fee would cost an extra £210, although if you managed to pay the credit card off over 12 months at 0% interest, that's the equivalent of a loan at just 3% APR.

Find out if the dealer you're buying from charges a fee, then work out how much extra you'll be paying for using your card.

If your chosen dealer doesn't charge a credit card fee, you might be better off using your 0% card instead of paying cash - not only will you benefit from credit card protection, but you can keep your money in a savings account earning interest.

If you can't pay off the cost of the car before the 0% deal ends, you might be able to move the debt to a 0% balance transfer card or a low APR card to avoid paying high interest.

There's likely to be a fee charged to transfer the balance, though, normally around 1.5-3% of the balance being transferred.

Paying with a credit card has the added benefit of giving you protection under the Consumer Credit Act in case something goes wrong after you've paid for the car, such as a dealer going into liquidation before you pick it up.

This applies even if you don't pay the full amount by credit card, as long as you put at least £100 on a card and the total purchase cost is between £100 and £30,000.

So whether your credit limit doesn't stretch to the full cost of your car or you've decided to pay the rest using a loan or cash, just paying a deposit by credit card will give you extra consumer protection.

Even if you only have a standard credit card with a high interest rate, you might decide it's worth putting down a deposit by card and paying a credit card transaction fee and possibly interest to benefit from this protection.

Remortgaging to buy a car

Pros & cons of remortgaging

  • Interest rates may be low
  • You'll own the car outright BUT...
  • Could pay more in interest overall if the cost is spread over the life of your mortgage
  • Reduced equity in your home
  • Arrangement could be slow and fees high
  • Your home is at risk when debt is secured against it

If you own your own home, one way to fund a large purchase like a car can be to remortgage your property.

Your mortgage might well be at a lower rate than most personal loan APRs, so this can appear an attractive option for borrowing the money fairly cheaply.

However, even at a low rate of interest, if you're paying back the money over a long period of time with a mortgage, you could still end up paying more overall.

A £7,000 personal loan over three years at 7% APR will cost £781.03 in interest.

Borrowing £7,000 as part of a remortgage and repaying it over 25 years on a mortgage with an APR of 4% will cost around £4,084.57 in interest (without factoring in inflation or any changes to the deal over such a lengthy period).

If your lender allows overpayments, you might be able to get around this by making overpayments to your mortgage each month, until you've paid off the portion you've borrowed for your new car - if you overpaid the £7,000 on the mortgage above in three years, it would cost just £440.04.

By Derri Dunn