What’s the best way to finance my new car purchase?

These days buying a new car is not just about choosing the make, model and colour, you will also have to decide what type of finance you prefer. Unless you are fortunate enough to be able to pay cash, choosing the right finance is critical.

Here are the options available:

Unsecured Personal Loan

• This type of loan is not secured against an asset, such as your property
• The monthly payments and interest rate are fixed
• The car is owned by the purchaser from the start and they have the right to sell the car at any time, but the loan will continue regardless
• If the loan is paid off early then a charge is normally levied

Secured Personal Loan

• This type of loan is secured against an asset, normally the borrowers home
• The interest rate on this loan will normally be lower than for an unsecured loan
• If the borrower fails to keep up the loan repayments then the asset secured against the loan can be repossessed

Personal Contract Purchase (PCP)

• This type of loan allows the borrower to pay a deposit followed by lower monthly payments and a final 'balloon' payment to gain ownership of the car
• The final payment is calculated at the beginning of the loan as is based on the predicted future value of the car
• Monthly payments are normally lower than on a secured personal loan
• The borrower does not fully own the car until the final payment is made
• Exceeding a pre-agreed annual mileage limit can incur extra costs
• The borrower cannot sell the car without paying up the PCP first

At the end of the contract period the borrower has the option to:

• Make the final payment and keep the car
• Hand the car back
• Use the difference between the final payment and the value of the car as a deposit on a new car
• On many contracts there is the ability to hand back the car once 50% of the total finance is paid

Hire Purchase

• Normally arranged by the car dealer
• A deposit is required ,with the bigger the deposit the lower the monthly payments
• You must settle the finance before selling the car

Conclusion

• There is no single best way to finance a new car purchase it comes down to personal choice and budget
• The most important thing to check is the total amount payable over the term, and then shop around
• Check the APR (Annual Percentage Rate), the lower the rate the less you pay in interest
• Check to see if there are any arrangements fees or set up charges
• If using a PCP then make sure you understand what happens at the end of the contract
• Never arrange a car loan over more than 4 years as the chances are that you will need to change your car by then
• Shop around before visiting the dealership so you can then negotiate
• Never remortgage to purchase a car as you will be repaying the loan over a long period adding to the total cost