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How to finance buying a car

| Insurance

Purchasing a brand new car is always exciting but it’s also an expensive purchase that involves lots of important decisions. Do you know what car you want, how much the insurance will cost, whether you want a new or secondhand car, what type of fuel it should have and how you will pay for it? These are all important questions that you should try to figure out before going car shopping, either online or at a dealership. But of course, you need to be able to afford the vehicle you want, so thinking about how much money you can put down as a deposit and how much you can afford to pay per month is really important.

What is the best way to buy a car?

While there are many ways to buy a car, the ‘best’ way is likely to differ from person to person, depending on their financial situation but also other circumstances, such as their credit score..

Firstly, you can go through a private dealer, looking for adverts in local newspapers or auction sites, such as eBay. This can be a good option for those looking for a secondhand car at a good price. It allows you to find local cars for sale so you can view them yourself at your own convenience. But don’t forget that private sellers won’t be able to provide finance options - they usually require you to pay the whole amount upfront and in cash. While sometimes this can be a good option as it erases the matter of interest, it can be a slightly riskier way of buying a car and it’s more likely that you’ll want to spread the cost out over a period of time.

This is why dealerships remain the most popular way to buy new or used cars. While dealers still accept cash, you also have the option to pay a monthly fee over a set number of months or years. But even with this option, there are still a couple of finance options available.

The first is known as hire purchase (HP). This is where you put down a deposit (usually around 10 per cent) and then a loan is taken out against the remaining cost of the car. The loan is paid back monthly for a specified amount of time and once the last payment has been made, the car is officially owned by you. The time period for HP is usually three years but you can pay the car off over up to five years. The benefits of HP include low interest rates, low deposit and flexible repayments.

The second is known as personal contract purchase (PCP).

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How does PCP work when buying a car?

This kind of financial agreement is similar to hire purchase (HP), except you don’t own the car at the end of the contract. Instead, you can trade the car in for another model, give it back altogether or pay a final balance which means you can own the car and keep it for as long as you wish. While monthly PCP payments tend to be lower than HP, which makes it a more desirable option for some, you won’t automatically own the car at the end and may be stuck with a large balloon payment. You may also be required to pay an additional fee if you go over the specified mileage allowance or to cover general wear and tear. However, it can be a good option if your annual mileage is low and you wish to switch cars regularly.

With either HP or PCP, the bigger the deposit you can put down, the better, as it means you’ll be paying less each month and there’ll be a lower amount of interest. Alternatively, you could keep monthly repayments the same and instead reduce the amount of time of the contract.

Can I buy a car with no down payment?

You can purchase a car with no upfront payment, however you should be wary of doing this. When you don’t pay a deposit, the monthly repayments can shoot up and you’ll be paying much more interest than if you put a small amount down. Ideally, it’s something you should avoid where possible.

You can, of course, purchase a car outright with no need for a deposit or monthly payments.

Can the government help me buy a car?

Currently, the only government grant available to help you buy a car is the electric car grant. For vehicles that have very low emissions, such as electric cars and plug-in hybrids, the government can offer up to £3,000 discount. You don’t have to do anything to receive this discount - any dealership will automatically knock it off the price of the car. Examples of cars that include this discount are:

  • Nissan LEAF
  • Peugeot e-208
  • BMW i3
  • Kia e-Niro
  • Renault ZOE
  • Tesla Model 3
  • Volkswagen e-Golf*

However, if you regularly receive benefits, such as the higher rate Disability Living Allowance, you may be eligible for a mobility car. These cars allow you to exchange your monthly payments for a car, and in some cases cover the full cost of the vehicle. It would be worth looking into further and doing some research to see if you qualify, as it could allow your vehicle to be paid for you.

Don’t forget to get in touch with your insurance provider should you switch vehicles or change the type of vehicle you drive.

*Information taken from and correct as of January 2021.

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