When buying a car it’s important to consider all your payment options so here we weigh up their different pros and cons.
Deciding which payment option meets your needs
Your car payment options explained
- Paying in cash is invariably cheaper than buying with credit
- With credit, always work out the total repayment cost
- Find out how car finance agreements work and shop around for the best deal
After your home, a car is likely to be the most expensive purchase you’ll ever make. Don’t assume you know the best way to pay without doing some research:
Cash. Nearly always the most cost-effective way to buy a car if you have enough in savings.
Personal loan. With a personal loan from a bank or building society you can typically spread the cost over one to ten years. The monthly repayments can be higher than for other options. You’ll also own the car which means if you got into financial difficulties you could sell it. But if your credit rating isn’t good you may find it difficult to get one.
Find out more about buying a car through a personal loan
Hire purchase. After paying a deposit of normally around 10%, you make fixed monthly payment over an agreed period. The car isn’t yours until after the final payment, unlike with a personal loan.
Find out more about buying a car through hire purchase
Car leasing. This is more like a long-term rental, in that you make fixed monthly payments to use the car until the contract expires. There are two main types of car leasing – personal contract hire (PCH) and personal contract purchase (PCP).
The payments tend to be lower than with other types of car finance, but there’s a mileage restriction. And with PCH you’ll never own the car, whereas with PCP you have the option of buying the car at the end of the contract by making a ‘balloon payment’.
Find out more about leasing a car
Remember
It’s good to compare APR (annual percentage rate), but make sure you look at the total repayment amount as well.
Credit Card. Using a credit card to pay all, or part, of your car’s purchase price will give you extra protection on the full purchase cost – as long as you pay at least £100 of it by card and meet your monthly card payments. However, some dealers charge a card-handling fee – sometimes as much as 3% – and some may not accept credit cards at all.
Find out more about using credit cards
Peer-to-peer loan. This is borrowing and lending between individuals through websites such as Zopa. Although peer-to-peer loans bypass traditional financial institutions such as banks or building societies, you still need a good credit score to get the best rate.
Find out more about peer-to-peer loans
Things to remember before making a decision
Top Tip
Make sure you get the most for your existing car, whether you’re part-exchanging at the dealership or selling privately. The more you make on it, the less money you’ll need to raise for your new car.
If you’re thinking of taking out a personal loan or car finance arrangement, make sure that you:
- Will be able to afford the car’s running costs on top of your monthly payment. Check your budget then calculate the running costs – try our Car costs calculator tool.
- Compare interest rates by looking at the annual percentage rate (APR), which includes the interest rate plus all other lender’s charges. The larger your deposit, the lower the interest rate is likely to be.
- Compare the total cost of borrowing, including interest and all charges over the term of the loan
- Think carefully before buying payment protection insurance or GAP insurance cover that pays out if your car is stolen or a total write-off. Both can be expensive and may give limited cover
- Remember that with leasing, you’re charged a fee if you repay early or exceed the forecast mileage
* In conjunction with the Money Advice Service