a couple agreeing finance on a new car

Ways to Finance a Car

Buying a car is a big deal. It’s a lot of money for one purchase, but for many, owning a car is vital for them to get to work, pick up the children or just to get out and enjoy Scotland. But even if you have the cash to hand, is that the best way to finance a car? Or should you take out a loan and, if so, from where?

Whilst this blog does not constitute financial advice, we’ve put together some of the basics on the various ways you can buy a car. As ever, if you would like to speak to someone from the Citizen’s Advice Bureau on the different options available to finance a car, please get in touch to book an appointment. We’ll be happy to help with any of your questions.

a couple being handed keys to a new car

Buying a car with savings

If you have been saving up to buy a car, you might have a lump-sum available to invest. This can be a good idea for some, as it means you immediately own the car outright and don’t have to have any credit checks on your name. It also means you are free to sell the car whenever you want. This is important especially with new cars, as their value reduces quickly (called depreciation) over the years. 

However, it is rarely a good idea to use up all of your savings at once. By doing so, you will not have any money to fall back on in case of an emergency. What happens if your boiler breaks and you need a new one? Or what if your house needs major repairs, or a pet gets sick? It may be that if you have used up all your savings on a car, you will be forced to take out a loan further down the road which may be a more expensive option than a car loan.

Before spending a lot of money at once, it’s important to weigh up the pros and cons of owning a car outright versus not having a monetary safety net to fall back on.

Taking out a car loan

For many people, finding a car loan is the only way they will be able to buy a car. This could be a new or second-hand vehicle. The trouble comes not just with finding where to loan from, but also what sort of loan to get.

There are three options here:

  • Personal Loan
  • Hire Purchase
  • Personal Contract Purchase (PCP)

We will outline the basics of what each type of loan has to offer here. But
again, please be aware that this is not financial advice. If you would like to
speak to us, please get in touch to book an appointment with EDCAB today.

handing over keys to a new car

Personal Loan

A personal loan can be a simple way to get enough money to buy a car. You can get loans from places like banks, building societies and even the Post Office. If your application is successful, they will agree to give you a certain amount of money which you will repay over a few months or years. They will charge interest on this as their fee, so you will always pay back more than you borrow. 

It’s important to look around for the best deals before you take out a personal loan. Some companies will offer better interest rates (meaning lower interest rates) than others. And what loan you can get depends on your personal situation. For example, they will want to know if you are employed, own property, what your annual income is and if you have any dependents like children. They will also take your credit history into account. 

Because they will loan you the money, once you use it to buy the car you will own it outright. This means you are free to sell it on at any point if you wish, although you will still have to pay back the loan. 

Hire Purchase

If you take on hire purchase, you will essentially be renting your car until you make the final repayment, at which point you will gain ownership. 

Hire purchase agreements are not as popular as they once were, although many people still use them to finance a car. They are usually found in car franchise dealerships and sometimes have special offers. 

They work in a similar way to a personal loan, but you will need to pay an upfront coast, normally 10% of the total cost of the car. You will then repay the rest of the money owed over the next 1-5 years. At that point, after you pay the ‘option to purchase’ fee, ownership transfers to you.

Hire purchase can be good for those with poor credit ratings that may not be able to get a personal loan. This is because the loan is secured against the car. If you fail to make any repayments, the car could be taken away from you.

a close up of someone signing a car loan agreement

Personal Contract Purchase (PCP)

This is a more complicated way of loaning money to buy a car but suits those people who may wish to drive a different car in a few years’ time.

When you agree to a PCP, the car dealer will expect a deposit on the total cost of the car, normally around 10%. You will then agree how long to take the loan out for, and the dealer will estimate the worth of the car at the end of that time. This is the amount of money you will have to repay. 

For example, you want to buy a car that costs £10,000. You will pay a 10% deposit (£1,000) so you are looking for a loan for £9,000. 

You take out a loan for five years, and it is agreed that at the end of those five years, the car will be worth £6,000. So you only need to take out a loan of £3,000 to pay back over those years. 

However, it’s important to note that at the end of your loan, once you have paid back everything you owe (£3,000 in the above example), you still won’t own the car. The car financing company do. Most will offer you the opportunity to buy the car by paying the difference – in this case, you would need to pay an extra £6,000 plus charges. Otherwise, you hand the car back and find a new one, or just walk away. 

This can be a good option if you want to drive a car that you otherwise could not afford, but much like renting a place to live, you won’t automatically own it when the end of your agreement comes around. 

Best ways to get a car loan

So as you can see, there are different ways to finance a car purchase, and
each way will suit different people. If you are considering ways to finance a car, and would like more information, please give us a call. We’ll happily help advise where we can.

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