05 September 2016

Our guide to paying for your next car purchase

Are you buying your first car or upgrading to a different model? If so, you will be thinking about which payment option is right for you. Here are the four most common ways you could fund your car purchase.

We recently asked people who follow us on Twitter about how they bought their last car. The results revealed that, while cash is still king, dealer finance is also a popular option.

When asked ‘When you bought your last car, how did you fund it?’;

  • 43% used savings or cash

  • 31% opted for dealer-arranged finance

  • 23% funded their new car through a personal loan

  • 3% relied on a credit card to make their purchase. 

Of course, the payment method you choose will depend on your personal circumstances. You may have all of the above options open to you or perhaps just one or two.

We look at the three most popular choices, cash, dealer finance and personal loans.

Cashing in

The main advantage of buying a car with cash or using money from your savings is that there are no monthly payments to make on top of the usual running costs such as fuel, insurance and vehicle tax. Paying for your car in full upfront could also save you money on finance interest rates if that’s another option available to you.

One of the main downsides to paying for a car using savings is that you need to save the money upfront, which depending on your circumstances and the value of the car you want to buy, could take some time. If you’re buying a car privately, it’s a case of ‘buyer beware’ and you have no legal protection once you’ve handed over your money. When paying cash at a dealer, you’re covered under the Consumer Rights Act 2015.

If you’re thinking of replacing your vehicle in the next few years, you could open a savings account today with a £1 deposit.

What’s the deal?

Depending on the dealer and value of car involved, finance could be another option. A benefit is that it’s available immediately at the dealership and you can complete all the paperwork right away.

If you don’t shop around, you could end up paying more money over the course of the agreement than with an alternative method such as a credit card or personal loan. The amount of interest you’ll pay depends on the individual terms being offered, so it’s worthwhile doing your homework to compare costs and whether your monthly payments could rise during the course of your agreement.

Stuart Masson, Editor of independent motoring website The Car Expert, shares his advice on dealer finance: ‘The big things to look at on any finance contract are the APR (annual percentage rate), the total amount payable and the payment schedule. The most common form of dealer finance for private buyers is the PCP (personal contract purchase), which involves relatively low monthly payments but with a large final settlement if you want to keep the car or some specific terms and conditions if you want to give the car back.’

Masson also emphasises the importance of not just taking the first deal on the table. ‘APRs are generally higher on a secured loan from a dealer than they are on unsecured loans from a bank or building society (meaning you will pay more in interest and/or fees), but the actual rate will vary and you should shop around to make sure you are getting the best deal.’

The personal approach

A personal loan could be a suitable choice for you if you don’t have/don’t want to use cash or savings. It may also be a more affordable alternative to dealer arranged finance. With a personal loan, your payments will be fixed for the agreed period, making it easier to budget for the length of the loan. 

As with any credit commitment, you should look at your other monthly outgoings to make sure it’s affordable at the rate you’re being offered and length of time you’re looking for. 

Having a good look through your finances could identify areas where you could save money in order to make a personal loan for a new car more affordable.

Looking for a loan?

Find out more about an unsecured car loan with Nationwide.

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