Even if you've got enough to to buy up front, a finance plan might be a better idea

Speak to our advisers to find out what your options are

Last updated: 02/02/2022 | Estimated Reading Time: 4 minutes

What is the best way to buy a car? 

Your car is probably the second most expensive thing you will buy after a home. This means that you will want to do your homework before delving into your pockets. Whether you’re buying a new or used car, our advice below will give you the insight you will need to choose a financing option that won’t leave you with sleepless nights.

In This Guide:

What is the best way to buy a car?

The cheapest way to buy a car is generally to fund all or part of it in cash. Not many individuals have access to such large lump sums of money, however, and this is when financial assistance becomes an option. But the number of different car finance options can be overwhelming and choosing the best deal that’s suited to your lifestyle can be a daunting task.

To make sure that you choose the best way to buy a new or used car for you, you may want to scrutinise the following financial options.

Personal contract purchase

If you plan on changing cars every few years, then a personal contract purchase (PCP) may be a suitable option for you.  With this type of car finance, you will pay a deposit (usually around 10%-20% of the vehicle’s value), low monthly instalments, and one lump sum (referred to as a balloon payment) at the end of the contract.

As an alternative to paying back the lump sum at the end of term, you can hand the car back to the dealer, trade it in and sign a new contract or sell it privately to clear the balloon payment. Those are the options that will be available to you if you do not have access to cash to clear the final payment.

The advantages of a Personal Contract Purchase are:

  • The deposit is generally low
  • The monthly instalments are kept low
  • The repayment terms are flexible
  • You have options to choose from at the end of the repayment term

Hire purchase

When agreeing to a hire purchase contract, the steps involve paying a deposit (usually between 10% - 20%) and then repaying the balance, plus interest, in monthly instalments until the term finishes. You will own your car when the last payment has been made.

Keep in mind, however, that if you miss a payment, your finance company has the right to reclaim your car. With this option, interest rates can also be quite high but you will not have to pay out a lump sum at the end of the term.

The advantages of a Hire Purchase agreement are:

  • The deposit is typically quite low
  • It’s one of the easier types of finance to be approved for
  • The repayment terms are flexible
  • Dealers offer competitive fixed interest rates
  • You will own your car when you make your last instalment

Leasing (personal contract hire) 

Under a lease agreement, you lease the car and hand it back to the dealer at the end of your agreement term. You pay the dealer a fixed monthly instalment for the use of a car (usually with servicing and maintenance included) – and there’s no deposit required.

Depending on the deal you are offered; Personal Contract Hire can cost more or less than Personal Contract Purchase. However, you’ll have greater flexibility to switch providers and because service and maintenance costs are included, you may save money either way.

The advantages of Personal Contract Hire:

  • The monthly costs are fixed
  • Includes servicing and maintenance costs
  • You do not have to worry about the vehicle depreciating in value
  • The payment terms are flexible
  • You are generally given the option to change providers 

Personal loan

A personal loan can be used to purchase a new or used car. A personal car loan can be taken out at a bank, building society or a private finance provider.

If you think that this is a good option for you, then it's important to do your homework. Consider how much you want to borrow and for how long (and base the total amount borrowed on how much you can comfortably afford to repay with interest included).

The advantages of a Personal Loan:

  • Personal loans are typically more readily approved (if you have a good credit score)
  • You can choose how much you want to take out
  • You can get a competitive fixed interest rate if you shop around

Bad credit car finance

The ways in which a person can buy a car are seemingly endless and most options will accommodate the purchasers’ needs well. But what if you have a bad credit rating? Will the above options still apply? Having a low credit score can reduce your chances of securing the best deals, but there are still a few simple things you can do to improve your chances.

For example, in the UK you can:

  • Address problem areas in your credit report
  • Register to vote
  • Make current payments on time
  • Increase your initial deposit
  • Avoid applying for too many loans

Click HERE for more information on how you can get car finance with bad credit.