If you do not have all the cash upfront to buy a car, you can use finance, which means you make an agreement with a lender to pay monthly instalments over a period of time, plus interest.
Car finance has become the most popular way of securing new or used cars in recent years, as it allows you to spread the cost, on average between one to five years.
Financing a car allows you to have a vehicle without actually buying it. In fact, in most cases it is the lender that owns it until the end of the finance period, at which point you can choose to buy it with a balloon payment, return it or exchange it for a new one.
You can save money on the overall cost of a car by opting for a shorter finance period with higher monthly payments, or by putting down a deposit, like with a house.
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What types of car finance are there?
Under a personal contract purchase (PCP) you are required to pay a deposit of about 10 per cent and make fixed monthly repayments which cover the difference between the amount you’ve borrowed and the amount the firm sets as the ‘balloon payment’ – a large payment that can be made at the end.
You’ll pay this amount off during the deal, plus interest. So you’re not paying off the full value of the car.
The monthly payment is then this amount divided by the term of the deal, which is usually 24 or 36 months, minus the deposit you’ve put down.
Interest rates tend to start from about 4 per cent although some dealers may offer 0 per cent interest.
At the end of the finance period, you can hand back the car to your lender, exchange it for a new one, or make a balloon payment to buy it outright.
It is the most common type of finance because of cheaper monthly payments and is preferred by those keen on changing cars more often.
Hire Purchase (HP) is similar – it also requires you to put down a deposit of around 10 per cent of the value of the card and to make monthly payments.
However, the car is yours as soon as you make the last payment. Monthly instalments are higher than with PCP because you do not need to make a final large payment, but they will be fixed so you know what you’re paying.
Interest rates will have gone up for those taking out HP contracts in recent times, which means it may be worth carefully evaluating your options.
If you are certain you do not want to buy a car but only hire it, then leasing is your best option as you have to hand back the car when your contract ends.
You will not have to pay anything extra when you do, so long as you have not gone over the mileage limit and there is no damage.
Leasing is generally only available for new cars, and like PCP, your payments only cover the car depreciation, so they are usually lower.
However, it may be difficult to find an affordable car lease deal if you have a bad credit score. This type of finance is often used by people who want to drive cars they cannot afford to buy.
Finally, you could just get a personal loan from a bank or building society to pay for your car. This may come with higher interest rates than car finance deals, but the vehicle is yours from the beginning.
