In this week's millennial money episode, I ask financial expert Damien Fahy, what is the best way to buy a car?
If you buy a car from a car showroom for example, they can offer you finance to help you buy it. There are three main types of car finance:
- PCP (Personal Contract Purchase)
- PCH (Personal Contract Hire)
- HP (Hire Purchase)
None of the above actually allow you to own the car outright at the beginning but with PCP and HP you can own the car at the end. If you would like to know more about car finance see our article car finance explained.
One of the most obvious ways to buy a car is with cash. The benefit of buying a car with cash is that you can own the car outright as opposed to car finance where you are just the registered keeper (until you have paid the loan). Cash is good if you wish to own the car outright but with the obvious downside being that you'll need to have the money in the first place. If you pay by cash it is the cheapest way of buying a car as you will not pay any interest; the value of the car is the amount you pay.
Another option is to get an unsecured, low-interest loan, over a typical period of 3 to 5 years. Depending on the value of the car, the interest rate would often be lower than if you purchased the car using a credit card, but you're still going to have some sizeable monthly repayments. With a loan, you will be paying the full value back over the agreed period.
It isn't generally advisable to buy a car on a credit card unless you have a deal that offers 0% on purchases. Even so, 0% purchase deals will often only run for between 12 and 24 months and so if you have not paid off the car by the time the deal runs out, you could find yourself paying around 18%-27% in interest. One benefit of paying on a credit card is that it does provide additional protection via section 75 of the Consumer Credit Act. It means that if you bought a car with a credit card and the car company subsequently went bust or didn't deliver the car, the credit card company is jointly liable and so you can make a claim through them to get your money back.
Paying for a car on a debit card means you will pay no interest but keep in mind that you have less protection compared to paying on a credit card (as section 75 of the Consumer Credit Act only applies to purchases made via a credit card).
Bank of Mum & Dad
Sourcing a loan from friends or family may be an option for some. Remember that money is an emotive subject and so be clear about the terms of the loan from the beginning. There may also be some inheritance tax complications so make sure that you do your research before you proceed.
Peer to peer loans
A peer to peer loan is a form of borrowing that cuts out the middleman. It is a bit like a normal loan but cuts out the bank. Peer-to-peer loans can be a cheaper way to borrow than a standard loan, but the lending criteria can sometimes be tougher.
Buying a second-hand car
Buying a car second hand may be cost-effective as you will be less impacted by depreciation. The car will inevitably cost less, meaning you may be able to pay in cash or require a smaller loan.
Buy a car based on your personal situation - it is important to remember that there are certain risks involved with all ways of purchasing a car. Always do what is best for your own financial situation and try to consider all of the risks involved.
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