Car financing explained

So you’ve found your ideal car but how are you going to pay for it? There are plenty of options but you need to make the right decision for you.

Some buyers pay for their car using cash but that’s not an option for everyone. You may even be tempted to pay for your car using a credit card which will give you some protection if the car’s faulty. However, not all car sellers are able to take credit card payments and interest rates can be extremely high. You also have to be pretty self-disciplined to pay off what you borrow and not just the minimum monthly payment. Failing to do so could end you up still owing money long after the car is gone.

A popular option amongst car buyers is a personal loan which can be arranged through a bank, building society or specialist lender. Repayment periods can be set to suit your budget and interest rates can be very competitive which means you can get a great deal. However, personal loans can tie up your limited credit life which can mean that you may find it more difficult to borrow money for other purposes until the loan is repaid in full.

If you’re buying the car through a dealer then you can usually also arrange your finance through them. This can be very convenient as the dealer will be able to help you with all the paperwork, process the payment and arrange collection of the car all in one go. It can also give you extra room for haggling. The dealer is obviously eager to sell the car so they may well offer you a very competitive rate of interest.

There are two main ways to finance a car through a dealer. The first, Hire Purchase or HP as it’s often called means that you pay off the full balance of the loan over a set period of time. This is usually anything between twelve and sixty months and at the end of the period you will own the car outright.

The second type of car dealer finance is Personal Contract purchase or PCP. A PCP gives you a lower monthly payment but the trade-off is that you’ll still owe a lump sum after the end of the term. At the end of the term you can either hand the car back, trade it in for another one or pay it off and own then car outright. A PCP can be a very cost effective way to drive away a new or nearly new car but remember you won’t own the car outright unless you make the final payment. You can also feel tied in to changing your car more regularly than you intended.

However you decide to pay for your next new or used car you need to shop around for the best deal and always make sure that you can afford the payments. Then car ownership should be a pleasure and not a pain!