What's the best way to finance a car?

So, you’re in the market for a new car.

Perhaps your commute just got longer, your old car has broken down or you’ve just decided it’s time for a change.

Either way, once you’ve settled on what you want to buy, the next question is how are you going to pay for it?

If you think a personal loan might be the best way to go, we’ve got you covered. We’ve provided credit to millions of customers over the last 21 years, and approved more than 25,707 applications last month alone.

Our rate guarantee means that over half of our customers receive the advertised rate of 3.5% APR Representative on amounts from £7,500 - £15,000, but if you're given a higher APR we guarantee that you'll never pay more than £180.87 per month, when you borrow £7,500 over 5 years - provided that you keep up with payments.

We’ll even give you a no-obligation, personalised quote, based on your own circumstances and credit history, so you know how much you’ll be paying back each month before you apply.

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Car loans road

Car loans are the most popular reason for getting a loan from us, in fact over a third of our paid out loans are for people to buy their next car.

Car loan paying for your car

Paying for a car: your options explained

There are a range of ways you can pay for a new or used car and it can be tricky to know where to start looking for finance. So if you're not sure if a car loan is for you, we've taken a look at how the options stack up.

 

Should I use my savings to buy a car?

If you have enough set aside for the car you want to buy, its worth considering using your savings to pay for it. There will be no monthly payments to make and if you're disciplined, you can put the cash aside that you would have spent on payments to build your savings up again.

Additionally, as interest rates are currently low, the amount of interest you might lose from not having the savings in a bank account for a few months is likely to be less than the interest you’d pay on a finance product anyway.

However, not many of us have a spare £10,000 tucked away to freely spend on a new car, and even if you do, it could be risky to leave yourself without an emergency fund while you save the money up again.

If you do have some savings you’d be happy to contribute to a car, you could use it as a starting point and use a loan to cover the rest

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Using your savings?

If you’re considering using part or all of your savings to buy a car, and want to see what you could buy with a little help from a loan, take a look at our guides.

Manufacturer finance options

Hire Purchase (HP)
Personal Contract Purchase (PCP)
Leasing

Hire Purchase - What is it?

Hire purchase is a financing option where you put down a deposit – generally 10% of the car’s value - and pay the rest in monthly installments, for between 1 and 5 years depending on your agreement.

Of course, there is interest attached to hire purchase products, and although rates can be as low as 5% for new cars, they often rise quickly for older models.

Hire purchase or personal loan?

In many ways, hire purchase agreements function much like a personal loan, but there are a couple of very important differences.

Firstly, a hire purchase agreement is just that – you’re simply hiring the car until you’ve fully purchased it. You won’t own the car until all the payments have been made, including an extra £100-£200 ‘option to purchase’ fee at the end of the term. If you fall into financial hardship and are behind on payments, the car can be repossessed.

Additionally, if you opt for a hire purchase agreement, you’re not treated a cash buyer. A loan enables you to negotiate on price – as you’re paying with cash from your own bank account.

Summary

tick Usually only have to raise a low deposit amount
tick Fixed interest rates and monthly repayments can be spread over up to 5 years
tick Less risk to the lender as your loan is secured against collateral (the car). May be a good option for those with poor credit
tick Higher interest and extra fees can make this an expensive way to borrow
You don’t own the car until the end of the hire purchase term – so it can be repossessed if you have difficulties keeping up with payments 
As you’re not a cash buyer, you can’t negotiate on price


The real cost of hire purchase

To help you compare the cost of hire purchase against a personal loan, we’ve looked at how much borrowing for a £7,500 car over 4 years would set you back using each option.

  Hire Purchase Personal loan
Deposit £750 £0
Loan amount £6,750 £7,500
Interest rate 6%* 3.5% - Ikano Bank APR Representative
Monthly repayment £158.04 £167.49
Option to purchase £150 (average) £0
Interest over 4 years £835.92 £539.52
Total cost of car £8,485.92
(£7,585.92 repaid + £750 deposit & £150 in fees)
£8,039.52

Personal Contract Purchase - What is it?

Slightly more complex than hire purchase but often resulting in lower monthly repayments, if you opt for a personal contract plan, you’ll pay a deposit of around 10%, and then make monthly payments towards the difference between the car’s sale price, and its estimated resale value (based on predicted mileage over the term of the agreement).

As you’re not paying the full price of the car, your repayments will be cheaper. But you also won’t own the car, even at the end of the term. Instead, when the agreement comes to an end you’ll have the option to:

  • Pay off the remaining balance so the car is yours to keep
  • Trade the car in, and start another agreement on a different car
  • Hand the car back – in which case you won’t have a vehicle anymore

Summary

tick Low deposit and fixed monthly payments
tick Flexible repayment term (usually 12-36 months) and no commitment at the end of this
tick You don’t own the car, and will have to raise the outstanding balance at the end of the term if you want it to be yours
If you go over the estimated mileage and/or the car is in poor condition, you’ll have to pay extra charges

Leasing - What is it?

Leasing works in exactly the same way as a personal contract plan, but there’s no option to buy the car at the end of the agreement – you simply hand it back to the dealer and either start a new plan, or walk away.

The good news is that service and maintenance costs are included when you lease a car, but this can make the monthly payments higher – with nothing to show at the end of it – as your dealer will have a standard supplier for these services, which might not always be the most cost effective option. 

Summary

tick Fixed monthly payment for most of your motoring costs
tick Good way to get a new car without worrying about it depreciating in value
tick Interest rates can be high - and monthly payments are often bigger than with other finance options because of the service/maintenance charges
If you go over the estimated mileage and/or the car is in poor condition, you’ll have to pay extra charges
Deposit can be as high as 3 months’ payment
You don’t own the car at the end of the term, and there’s no option to purchase it

Our car loans are easy to manage with fixed monthly payments

Personal finance options

Credit card
Personal loan

Credit cards

As long as the car you want to buy doesn’t cost a huge amount of money, you may be able to get a credit card to cover the amount and often a new card will come with a 0% deal on purchases for an introductory period.

A big attraction of using a credit card to buy your car is that you may be protected under the Consumer Credit Act if anything goes wrong. You’re also not tied to fixed monthly payments; as long as you pay at least the minimum each month, you can raise or lower payments in line with your finances.

And with interest rates rising to around 18% (or possibly more) after the 0% introductory offer, it might not always be worth the initial saving if you can’t pay it off in this period.

Summary

tick 0% introductory interest rate
tick Purchase may be protected by the Consumer Credit Act
tick Can repay at the rate you choose
tick High interest rate after initial period
Amount you can borrow may be limited
Unable to benefit from cash discounts

Personal loan

Buying a car is the most popular reason for taking out a personal loan and it works exactly like any other type of unsecured loan, you’re quoted an interest rate, and pay fixed monthly repayments for an agreed amount of time. We’re transparent about your interest rate, how much you’ll pay each month, and what the total cost of credit is from the start.

And the money is sent to your bank account - so you can buy the car anywhere you wish, and may even be able to negotiate a discount as a cash buyer.

Summary

tick No deposit required – but you can use some of your own funds to 'top up' the loan amount if you want to
tick Low interest rate
tick Fixed monthly repayments
tick You own the car outright
tick No fees for early repayment or overpayment
tick Gives you the option to pay in cash for a better price
tick Dependent on your credit rating, you may get a higher than advertised rate
Early settlement charges can apply

Representative Example: Loan amount; £10,000, Term; 48 months, Monthly repayments; £223.32, Total amount repayable; £10,719.36, Cost of credit; £719.36, Interest rate (fixed); 3.4%, Representative 3.5% APR.

Who we lend to:

  • UK residents over 18 years’ old (excluding Isle of Man and Channel Islands)
  • Earning at least £10,000 a year
  • With a good credit history (no previous defaults, CCJs, Debt Relief Orders, IVAs or bankruptcies)
  • With a UK bank account in your own name, which accepts Direct Debits

If all of these apply this doesn’t guarantee that your application will be accepted. We will need to do some additional credit and affordability checks.

Choose your loan amount and term on our car loan calculator to get a quick example of what the monthly payments could be. To get your personalised quote, which uses your credit rating and personal circumstances to tell you the exact rate of interest, how much interest you’ll pay over the term of the loan and how much your monthly repayments would be if your application is accepted, get a quote and apply.

If you’re not happy with your quote there’s no harm done, as it doesn’t leave a trace on your credit file. If you decide to apply you can complete the application online - in less than 10 minutes with no paperwork to sign.

All we need is your address details for the last two years, your current employer’s name and address (and how long you’ve worked there), basic details of your income and outgoings, and your contact information.

If your application is approved, you’ll receive the money in your bank account the next working day - so you can go car shopping straight away.

 

Get a quote and apply now 

 

*Source: www.moneysavingexpert.com/car-finance/hire-purchase