Car ownership is a significant financial move. For most people, only buying a house exceeds it in terms of sheer outlay. But there are many ways to purchase a vehicle - some kinder to your pocket than others. With so many options available, it's crucial to spend time working out what you can afford to pay - and how best to pay it.
Of course, buying a new car is much more costly than buying second hand. New cars have the benefit of being under warranty and may confer a certain degree of status. On the downside, new cars can eat up savings or lead to big monthly payments on hire purchase/loan agreements. New cars will also depreciate in value by between 15% and 35% in the first year alone. A second hand car may be much cheaper to buy, but may not come with any kind of guarantee. Finding a second hand car in good condition with low mileage is one of the simplest ways to cut the cost of buying a car.
It sounds obvious, but if a dealer knows you are interested in buying a particular car, they may agree a further discount. Whether you are buying new or used, this is always worth trying.
If you have savings available that can cover the cost of buying a car, this is the most cost effective option. Naturally, using your own funds means you won't pay interest on loans or other finance options. You might also decide to pay for a car partly with savings and partly on a finance agreement/loan. The more cash you can pay upfront, the better it will be for your pocket.
Next to buying outright, taking out a personal loan is the next most cost-effective way of buying a car. If you shop around you can get a low fixed rate and setup can be quick. However, you may have to wait for funds to arrive in your bank account.
This is when you take out a loan secured against the car itself. You normally pay a deposit of around 10%, then make monthly payments until the sum is paid off in full. This option can be costly for shorter agreements and you won’t actually own the car until you make the final payment. If you fail to make the agreed repayments, the car may be repossessed.
A PCP loan amount is calculated by subtracting the brand-new price from the predicted price at the end of the agreement. It is similar to a HP agreement, but repayments are lower. Once the agreement term is complete, you can return the car, or trade it in for another. If you want to keep the car, you can pay a ‘balloon payment' at the term's end. When you hand the car back you may have to pay other charges if you exceed the agreed mileage or there is excessive wear and tear.
This is a cost effective way of hiring a car which includes all maintenance and servicing, as long as the agreed mileage limit is not exceeded. Once the agreement concludes, you hand the car back - it is never yours. If you don’t want the financial burden of buying outright or on a HP/loan agreement, PCH might be a suitable alternative.
You may choose to pay for the car by credit card - in whole or in part. This gives you extra protection if something goes wrong - even if you pay a small amount of the purchase price by credit card. However, there may be handling fee - perhaps up to 3%.
A peer-to-peer loan is where the money is lent to borrowers by other members of the public - as opposed to a bank. Rates can be cheaper than regular banks, but not always. You will still need a good credit score to obtain such a loan. One of the best known peer-to-peer lenders is Zopa.
It's important to think carefully about what you can afford to pay for a car each month - or as a lump sum. Ensure you always have enough funds for an emergency.
If you take out some form of loan, ask the lender what happens if you miss a payment. If you find yourself unable to make a payment, you may be able to come to an agreement with your lender.
Make sure you understand APR (annual percentage rate) and try to get the lowest rate. Be aware of any early-payment fees or other charges.
