Financing your new car - your options

So you´ve decided that you need a new car? Next comes the difficult bit; choosing the right finance option to pay for your new car. There are several payment plans that you can choose from, and depending on your own circumstances, some may be more suitable than others.

MotorTorque takes the sting out of the tail of finance to give you a summary of the payment options so that you can ensure you get the best deal available.

If you´re lucky enough to be able to pay for your new car by cash, it gives you a distinct advantage over those that have to borrow funds. Paying by cash enables a quick, easy transaction, and it also gives you a higher chance of being able to haggle to get a good price on a new car. Should you wish to pay by cash, it would be prudent to use your credit card to place a deposit on the vehicle. Doing this gives you additional legal protection if something goes wrong with the car, as the credit card issuer has joint responsibility to sort out disputes over payments.

Just like using cash, paying by a loan organised through a bank or building society gives you additional bargaining power, as the monies are paid to you before you buy the car, and the car dealer still has the money paid up front in full. This will leave you with a contract with your bank or building society to repay the money loaned, and any interest accrued, in instalments over an agreed period of time. Shop around for the best APR on your loan, as the personal loan market is extremely competitive, and you should be able to get a good rate of interest. Pawnbrokers and moneylenders may be tempting, but be aware of the high interest rates. When approaching a dealer, avoid telling them that you are raising the money with a personal loan, as it will give you more leverage for haggling a good price.

Should your credit card issuer have a low interest rate, using a credit card can be a good way of financing your new car. Introductory rates from many credit card companies gives the new car buyer rates of interest as low as 0% over periods of up to one year. However, go over this introductory rate of interest and you will be paying at a rate that can be higher than personal loan rates from your bank or building society, so it is prudent to pay off the balance on your credit card before the introductory rates expire, enabling you to save hundreds of pounds in interest charges.

One of the most popular forms of car finance, the car leasing company buys and owns the car that you have chosen. You then lease the car by paying the agreed monthly instalments over an agreed period of time. This finance method gives a lower monthly payment than a personal loan, allowing you to get a better car for their money. Most people like to lease for a term length that coincides with the length, in months, of the manufacturer´s warranty coverage so that you´re covered if something major goes wrong with your car. At the end of the lease, the customer simply takes the car back to the leasing company.

A popular and effective way to finance your new car, hire purchase (HP), can work out as a good alternative to other methods of payment, especially if the list price of the car is higher than many personal loan limits, which are typically limited to around £20,000. However, the interest rates for hire purchase plans are usually more than personal loan rates, so be aware that you can often have higher monthly instalments to pay off. In addition, the provider continues to own the car until the full amount is paid off, giving the dealer an option to claim back the car at any time should repayments not be made, unless you have repaid more than a third of the value of the car, whereupon the company needs to take you to court to recover the vehicle.

Similar to deferred car purchase loans, personal contract purchase, also known as personal contract plans (PCP), enables you to purchase a car with a deposit against the vehicle, and then make monthly payments to the Finance Provider. Road tax is included for the first year in all cases, and for the life of the contract if maintenance is included. PCP gives you three different options at the end of the agreement:

Before you take out the plan, you will be given an estimation of the Minimum Guaranteed Future Value (MGFV) of the vehicle. If you wish to pay the final balance, and keep the car, which is based on both the predicted mileage and depreciation over the course of the PCP plan. The MGFV is used to estimate the monthly and final payment should you wish to keep the car at the end of the agreement.