So you want or need to buy a new car, but don't yet have the finance yet in place to do so. There are several possible sources of money, and our guide to car financing should help you decide on the best option for you.
Taking out a loan
Depending on how much you need to borrow, you might consider taking out a loan. A personal/unsecured loan will allow you to take out up to £25,000, assuming that you can pass the credit check. If you're a property owner, and need to lend more than £25,000 – or you're struggling to get a personal loan, you might apply for a secured loan; using your house as collateral in the event that you're be unable to keep up the repayments.
The interest rate (APR) you pay in either scenario depends on your personal circumstance, along with the amount borrowed and duration of the loan. That being said, tolerance levels for interest are around 5% - 13%.
The maximum borrowing period between personal and secured loans is quite significant. Personal loans peak at around 10 years payback, whereas a secured loan could be paid back over a period of up to 25 years, allowing you to space out the payments and make the installments more manageable.
Hire Purchase Plan
Hire purchase plans are generally offered directly by car dealerships, and allow you to technically take your car home same-day; and then pay for it in monthly installments. You'll normally be expected to pay a deposit. You can increase the amount you put down, thus reducing your monthly repayments, if you're in a position to do so. Like a personal loan, your application will be subject to a credit check, so you may have problems if there are any issues on your credit report. Furthermore, if you fail to keep up the repayments, the dealership is likely to try to repossess your vehicle to recover their losses.
Personal Contract Purchase (PCP)
PCP's bear some resemblance to hire purchase plans, but with the essence of a 'try before you buy' scheme. Basically, you're leasing the car for a monthly rate, which is lower than that of a hire purchase plan. At the end of the scheme you're welcome to hand the car back hassle free, but alternatively, if you want to keep it you can make what's known as a 'balloon payment' to assume ownership. Sounds like a win-win so far, but there are a couple of drawbacks. First of all there are conditions stipulated during the lease period (such as mileage allowance), which you might be fined for if you exceed. Also the 'balloon payment' amount is likely to total much higher than the monthly payments would have been if you'd just bought the car originally. With all of that in mind, PCP schemes can be a viable option if you're unsure of your driving needs in the future, or wish the try a particular vehicle out for an extended period.
Credit Card Purchase
Credit cards are much vilified, but can be very useful if used responsibly. Competition in the market has led to some providers offering up to 18 months interest free on purchases made with new account holders. So, if you can afford to pay the balance off within the introductory period, then you can loan the money completely free. However, you should also beware that if you don't clear the debt off in time, interest might be accrued at the astronomical rate of around 30%.
As an added bonus, buying on a credit card also gives you greater security as all credit card purchases between £100 - £30,000 are covered under the Consumer Credit Act, which means if something goes wrong, you can claim your money back from the credit card provider.Image: © Opolja | Dreamstime.com