At a glance

  • Taking out a loan to buy a car can help make it easier to pay for one of the most expensive purchases you’re likely to undertake
  • Different financing options have their pros and cons, so it’s essential to understand what you’re getting into
  • Your credit score will have a big say in the type of car finance you have access to and the kind of repayment deals you’re offered
  • The total cost of buying a car on finance will be affected by a range of factors, from repayment rates and charges to insurance

At a glance

  • Taking out a loan to buy a car can help make it easier to pay for one of the most expensive purchases you’re likely to undertake
  • Different financing options have their pros and cons, so it’s essential to understand what you’re getting into
  • Your credit score will have a big say in the type of car finance you have access to and the kind of repayment deals you’re offered
  • The total cost of buying a car on finance will be affected by a range of factors, from repayment rates and charges to insurance

At a glance

  • Taking out a loan to buy a car can help make it easier to pay for one of the most expensive purchases you’re likely to undertake
  • Different financing options have their pros and cons, so it’s essential to understand what you’re getting into
  • Your credit score will have a big say in the type of car finance you have access to and the kind of repayment deals you’re offered
  • The total cost of buying a car on finance will be affected by a range of factors, from repayment rates and charges to insurance

When we talk about car finance we’re referring to the borrowing that people use in order to pay for a new vehicle. While using finance deals to fund a car purchase can help to facilitate this major purchase, it’s still important to know what you’re doing.

The advantages of car finance

The low interest rates of the past decade have increased the availability of car loans, making it easier to buy a new car without having the funds available up front. In particular, car finance allows you to buy a new car that you might not otherwise be able to pay for in one go, and it also means you can get behind the wheel more quickly than if you have to wait until you’ve saved enough.

The borrowing terms are fairly flexible these days too, while the monthly repayments can be built into your budget in a way that helps you manage your money effectively.

The downsides of car finance

Each type of car finance has its own pros and cons, which we’ll look at a little later. Generally, the interest you pay on this type of loan makes it more expensive than a personal loan.

The problems also mount up if the repayments aren’t maintained, as with any other form of credit. For instance, falling behind on repayments or defaulting on the loan entirely will damage your credit score, making it harder to secure affordable credit in future.

Interest rates can vary widely on car financing deals, and different charges can lie hidden in the small print, potentially making the overall cost much higher.

The main options

Personal loans often work out as the cheapest form of borrowing, particularly if you have a good credit score, and you also own the car entirely while you repay the loan. But if you don’t have a good credit score it can be difficult to secure a good deal and take longer to arrange than other forms of finance.

Another common method is a hire-purchase agreement. This is where you pay a deposit and cover the rest with a loan. The loan is secured against the car and repaid in fixed monthly tranches over an agreed period of time (typically between a year and five years). This makes the purchase much more accessible, but it also means you don’t actually own the car until you’ve made all the repayments, nor can you sell it on.

A personal contract purchase (PCP) works in a similar way, with a deposit followed by monthly repayments. The main difference here is that the loan covers the difference between the value of the car when you buy it and the expected price at the end of your agreement, based on a predicted annual mileage figure.

This can keep the monthly repayments down, but if you want to own the car outright it will involve making a final ‘balloon’ payment that is much higher than the monthly amount. There’s also likely to be a charge if you go above the agreed annual mileage.

The other option at the end of the agreement is to swap the car for a different one and start again under a new PCP agreement.

The alternatives

Paying in cash (such as by debit card or bank transfer) would be many people’s preferred way of buying a car, as you’re not adding interest payments to the cost and you can sell it whenever you like. However, you might not have a lump sum available, don’t get the financial protection that is often available with other methods.

You could also use a credit card, provided the price falls within your credit limit. As with a personal loan, this means you own the car from the outset, while you can vary your repayments to meet your needs. There’s also the protection of the Consumer Credit Act, so you can reclaim the cost of purchases between £100 and £30,000 should things go wrong.

It's worth noting, however, that interest rates can be relatively expensive, and costs pile up quickly if you don’t keep up with repayments, damaging your credit record in the process.

Shop around

While finance agreements offer flexibility that can make it much easier to buy a car, each approach has its pros and cons. Much will depend on your credit record – a good one will open up the cheapest deals, while a poor one could make car financing a much more expensive affair.

Make sure you shop around and compare the different options, including charges and small print (such as annual mileage). Don’t forget to include additional costs such as car insurance when it comes to working out the total cost – these can mount up, too, potentially affecting your ability to keep up with those monthly repayments.

When we talk about car finance we’re referring to the borrowing that people use in order to pay for a new vehicle. While using finance deals to fund a car purchase can help to facilitate this major purchase, it’s still important to know what you’re doing.

The advantages of car finance

The low interest rates of the past decade have increased the availability of car loans, making it easier to buy a new car without having the funds available up front. In particular, car finance allows you to buy a new car that you might not otherwise be able to pay for in one go, and it also means you can get behind the wheel more quickly than if you have to wait until you’ve saved enough.

The borrowing terms are fairly flexible these days too, while the monthly repayments can be built into your budget in a way that helps you manage your money effectively.

The downsides of car finance

Each type of car finance has its own pros and cons, which we’ll look at a little later. Generally, the interest you pay on this type of loan makes it more expensive than a personal loan.

The problems also mount up if the repayments aren’t maintained, as with any other form of credit. For instance, falling behind on repayments or defaulting on the loan entirely will damage your credit score, making it harder to secure affordable credit in future.

Interest rates can vary widely on car financing deals, and different charges can lie hidden in the small print, potentially making the overall cost much higher.

The main options

Personal loans often work out as the cheapest form of borrowing, particularly if you have a good credit score, and you also own the car entirely while you repay the loan. But if you don’t have a good credit score it can be difficult to secure a good deal and take longer to arrange than other forms of finance.

Another common method is a hire-purchase agreement. This is where you pay a deposit and cover the rest with a loan. The loan is secured against the car and repaid in fixed monthly tranches over an agreed period of time (typically between a year and five years). This makes the purchase much more accessible, but it also means you don’t actually own the car until you’ve made all the repayments, nor can you sell it on.

A personal contract purchase (PCP) works in a similar way, with a deposit followed by monthly repayments. The main difference here is that the loan covers the difference between the value of the car when you buy it and the expected price at the end of your agreement, based on a predicted annual mileage figure.

This can keep the monthly repayments down, but if you want to own the car outright it will involve making a final ‘balloon’ payment that is much higher than the monthly amount. There’s also likely to be a charge if you go above the agreed annual mileage.

The other option at the end of the agreement is to swap the car for a different one and start again under a new PCP agreement.

The alternatives

Paying in cash (such as by debit card or bank transfer) would be many people’s preferred way of buying a car, as you’re not adding interest payments to the cost and you can sell it whenever you like. However, you might not have a lump sum available, don’t get the financial protection that is often available with other methods.

You could also use a credit card, provided the price falls within your credit limit. As with a personal loan, this means you own the car from the outset, while you can vary your repayments to meet your needs. There’s also the protection of the Consumer Credit Act, so you can reclaim the cost of purchases between £100 and £30,000 should things go wrong.

It's worth noting, however, that interest rates can be relatively expensive, and costs pile up quickly if you don’t keep up with repayments, damaging your credit record in the process.

Shop around

While finance agreements offer flexibility that can make it much easier to buy a car, each approach has its pros and cons. Much will depend on your credit record – a good one will open up the cheapest deals, while a poor one could make car financing a much more expensive affair.

Make sure you shop around and compare the different options, including charges and small print (such as annual mileage). Don’t forget to include additional costs such as car insurance when it comes to working out the total cost – these can mount up, too, potentially affecting your ability to keep up with those monthly repayments.

When we talk about car finance we’re referring to the borrowing that people use in order to pay for a new vehicle. While using finance deals to fund a car purchase can help to facilitate this major purchase, it’s still important to know what you’re doing.

The advantages of car finance

The low interest rates of the past decade have increased the availability of car loans, making it easier to buy a new car without having the funds available up front. In particular, car finance allows you to buy a new car that you might not otherwise be able to pay for in one go, and it also means you can get behind the wheel more quickly than if you have to wait until you’ve saved enough.

The borrowing terms are fairly flexible these days too, while the monthly repayments can be built into your budget in a way that helps you manage your money effectively.

The downsides of car finance

Each type of car finance has its own pros and cons, which we’ll look at a little later. Generally, the interest you pay on this type of loan makes it more expensive than a personal loan.

The problems also mount up if the repayments aren’t maintained, as with any other form of credit. For instance, falling behind on repayments or defaulting on the loan entirely will damage your credit score, making it harder to secure affordable credit in future.

Interest rates can vary widely on car financing deals, and different charges can lie hidden in the small print, potentially making the overall cost much higher.

The main options

Personal loans often work out as the cheapest form of borrowing, particularly if you have a good credit score, and you also own the car entirely while you repay the loan. But if you don’t have a good credit score it can be difficult to secure a good deal and take longer to arrange than other forms of finance.

Another common method is a hire-purchase agreement. This is where you pay a deposit and cover the rest with a loan. The loan is secured against the car and repaid in fixed monthly tranches over an agreed period of time (typically between a year and five years). This makes the purchase much more accessible, but it also means you don’t actually own the car until you’ve made all the repayments, nor can you sell it on.

A personal contract purchase (PCP) works in a similar way, with a deposit followed by monthly repayments. The main difference here is that the loan covers the difference between the value of the car when you buy it and the expected price at the end of your agreement, based on a predicted annual mileage figure.

This can keep the monthly repayments down, but if you want to own the car outright it will involve making a final ‘balloon’ payment that is much higher than the monthly amount. There’s also likely to be a charge if you go above the agreed annual mileage.

The other option at the end of the agreement is to swap the car for a different one and start again under a new PCP agreement.

The alternatives

Paying in cash (such as by debit card or bank transfer) would be many people’s preferred way of buying a car, as you’re not adding interest payments to the cost and you can sell it whenever you like. However, you might not have a lump sum available, don’t get the financial protection that is often available with other methods.

You could also use a credit card, provided the price falls within your credit limit. As with a personal loan, this means you own the car from the outset, while you can vary your repayments to meet your needs. There’s also the protection of the Consumer Credit Act, so you can reclaim the cost of purchases between £100 and £30,000 should things go wrong.

It's worth noting, however, that interest rates can be relatively expensive, and costs pile up quickly if you don’t keep up with repayments, damaging your credit record in the process.

Shop around

While finance agreements offer flexibility that can make it much easier to buy a car, each approach has its pros and cons. Much will depend on your credit record – a good one will open up the cheapest deals, while a poor one could make car financing a much more expensive affair.

Make sure you shop around and compare the different options, including charges and small print (such as annual mileage). Don’t forget to include additional costs such as car insurance when it comes to working out the total cost – these can mount up, too, potentially affecting your ability to keep up with those monthly repayments.

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