Different ways to pay for a new car, and how to choose the best one for you
A new car can be one of the biggest purchases of your life, so finding the best way to pay for it is essential. The key thing is to make sure you can afford any repayments.
You’ll also need to read the small print of your contract so you know what you can and can’t do before you’ve finished paying the car off.
Let’s look at your options when paying for a new car.
Buying a car with cash
Outright paying for your car with savings means you own the car straight away. If you need to, you could sell it straight away and keep the cash (which you can’t do under most finance agreements).
Obviously, it’s a lot of money in one go, so make sure you have enough left in the bank to cover any unexpected costs or major purchases in the future.
If you already have a car, you could part-exchange it and use the cash towards the deposit on a new one.
Buying a brand-new car with cash might be unrealistic for most of us, but a good quality used car could be in reach.
Alternatively, you could use some of your savings as a deposit on a new car finance agreement.
When working out how to pay for your next car, ask yourself what you can afford, and which payment method suits your lifestyle
Getting a car on finance
Personal Contract Purchase (PCP)
If you’re looking at a way to buy a new car you’ll hear a lot about PCP.
So what is it?
With PCP you pay an initial deposit and low monthly instalments, and a large portion of your loan is deferred to the end of the contract.
When you get to there, you can either pay this deferred lump sum and own the car, hand the car back and walk away, or start another agreement.
For dealers it’s a good way of keeping you moving from contract to contract.
Monthly PCP payments tend to be low, as you’re only paying the car’s depreciation value – not its total value.
There’s also a choice of options at the end so you don’t have to commit to any decision now.
Just be aware you don’t own the car until you officially pay it off, so you may have restricted mileage and other factors to consider while driving – and may have to pay extra if you breach any of the contract terms.
Always check the cost-per-extra-mile figures if you go over the agreed limit. It can soon add up.
Hire Purchase (HP)
Hire Purchase is another common way to pay for a car split over monthly payments.
After you’ve paid your deposit, you’ll pay equal monthly amounts that also include interest on your loan.
This will cover the full cost of the car and the extra amount for taking out the loan.
At the end of your contract you’ll usually pay an “option to purchase” fee then the car is all yours.
As the payments are equal, right up to the end, it can be easier to budget with HP. And you’ll own the car outright at the end of your contract.
As with PCP, while you’ve got the payment contract you don’t own the car, so you can’t sell it with “outstanding finance” (the amount left to pay off on the car).
You may also face mileage restrictions and other limits in your contract, so do make sure you read that small print.
Conditional Sale (CS)
Conditional Sale is less well known but is similar to HP.
Here you pay monthly instalments with interest until you officially buy the car.
The difference is a Conditional Sale doesn’t include the “option to purchase fee”.
As with all finance agreements, you don’t own the car until you’ve officially bought it, so you can’t make modifications or sell it without the lender’s permission.
If you fail to keep up with payments, your car may be repossessed by the company that sold it to you.
Car leasing can be quite affordable, and some leases include maintenance packages for extra peace of mind
Personal Contract Hire (PCH)
Personal Contract Hire is more commonly known as car leasing.
With this system, you pay a deposit and monthly instalments (often lower than other finance agreements) for a set period of time, then hand the car back.
You won’t own the car, it’s more like a long-term rent.
Car leasing can be quite affordable, and some leases include maintenance packages for extra peace of mind.
You’ll never own the car, though, so won’t be able to sell it at any point. You’ll also likely have a mileage cap that can get expensive to go over.
Learn more about the different types of car finance on Auto Trader.
There are other options to consider, too
Outside of finance agreements and cash, you could also talk to your bank about a loan, or paying for a car with a credit card.
If your credit score is good you can often get better rates with a bank loan than through a car dealer.
You can quickly search for loan deals with no commitment here.
Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.
Terms and conditions will vary, so make sure you fully understand the repayment schedule, interest rates, and other details before you sign.
Before you put your signature to anything, it’s always a good idea to speak to someone who knows their way around this area.
See if there’s a family member or friend who’s had to research the issue recently and get some advice.
Which payment method is right for me?
When working out how to pay for your next car, ask yourself what you can afford, and which payment method suits your lifestyle.
Run your budgets to see how much money you could put aside every month for a finance agreement – and whether you can commit to that amount for the contract’s duration.
Always check your contract for clauses on missed payments, early termination causes, and what you can and can’t do while paying off a car on finance.
If in doubt, consult free, impartial sites, such as Citizen’s Advice or MoneyHelper.
There are fantastic cars at a range of price points, so take your time researching and enjoy finding one you’ll be able to afford and enjoy for years to come.
3 things to do right now...
Search on AutoTrader for the best new car deals and see what takes your fancy and what you think you can afford. Many listings give example repayments for PCP and HP so you can get a feel for them.
Check out likely loan repayments by using Compare the Market’s quick and simple Loan Eligibility Checker.
Find someone independent who can advise you on the possibilities and any downsides. You might want to take them with you to a car dealer. Always ask the dealer for all the payments options and always ask for them to tell you the cheapest option.
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Don’t forget that while you may think that this article is brilliant, it is intended for information purposes only and should not be mistaken for financial advice or recommendations.
