Last Updated on Dec 19, 2019 by James W

Buying a car is complicated and that’s before you even start considering the financing options available for you. It’s definitely more exciting to think about the extras and creature comforts, the colour and the economy of a vehicle than it is the payment. Interestingly, in the UK, reports show that cost effectiveness is the most important consideration when consumers are looking to buy cars, this means that so many people will buy their new car based on the price.

However, it is only those people who are in an extremely exclusive and fortunate financial position who do not have to rely on credit to purchase their vehicle. For most of us, comparing how we are going to pay for a new car and saving up to make the investment is more likely. This guide could help you better understand what you are looking for by breaking down the options available to you:

Understand The Options For Buying Your Car

Personal Loans

A personal loan is an extremely flexible and low-risk way of borrowing money. A personal loan is not a dedicated auto loan, which means it can be used for anything consumers deem appropriate, including a new payment on cars.

There are so many options for sourcing cheap car loans, from traditional banks as well as online direct lenders. A direct lender will be better suited to those who need access to money quickly, for example, those who need to buy a car in an emergency after theirs has been written off. What’s more, when you find the car, with all your specific requirements, it is so important to act quickly. If it really is that perfect, someone else will be trying to steal your deal.

Online lenders allow consumers to stay flexible and dynamic. In some cases, they may be able to get money in the recipient’s accounts within an hour or so of an application being submitted.

The Most Flexible Way To Finance

Personal loans are popular for car loans because they are extremely flexible. The customer can select exactly how much money they want to borrow as well as the repayment period. Typically, this is anywhere from one to ten years.

How much you can borrow will be at the lender’s discretion and may affect the type of loan that is available to you. With so much appetite shifting to the online loans market, personal loan providers are able to offer cheap loans because investors are pushing money into the sector. However, this does also mean that lenders are able to increase their lending limit. A standard personal loan can range anywhere between £1,000 and £250,000 and up. Ultimately, a personal loan is a fantastic option for paying for your car, no matter your price bracket.

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You will need to apply and meet certain criteria to benefit from a cheap personal loan. This is really quite easy; many online lenders are able to offer pre approval access or compare the market for the most suitable option. Both of these services will only require a soft credit check which will protect your credit score. Moreover, knowing if you are approved for a loan without damaging your score could help you make informed financial decisions and gather all the information you need to be comfortable, both with your financial product and your new car.

Other Things To Consider When Using A Personal Loan For A Car

Make sure it’s affordable – Personal loans are extremely easy to access, especially if you have prime credit. This might make some consumers more likely to opt for a bigger, more luxurious or more expensive car than they had originally set out for themselves, simply because the access to credit can facilitate the purchase. However, this kind of instant gratification could be harmful if you are unable to keep up with the repayment schedule alongside other living and household expenses.

Fixed Vs Variable Rates – A interest loan with a fixed rate means that your repayments will be the same throughout the duration of your loan. A fixed loan is extremely reliable and safe, as you can dependably budget how much you are going to spend on car payments each month. In turn, a variable rate, especially on a loan that is of higher value, will fluctuate depending on the interest rate and economic situation at the time. This means you could be faced with a slightly higher bill than anticipated. If you are tightly budgeting and running close to capacity as it is, this might not be the best option for you.

The Deposit Is Up To You – You do not need a deposit when using a personal loan to pay for a car. You may need to secure the car (so that no one else can snap it up) with a deposit. However, as the amount you want to borrow from a lender is up to you, you can also cover the cost of the deposit. As long as you factor this into the loan request, there should be no need to pull together a cash deposit.

Secured Car Financing

It is also possible to get car finance from a dedicated creditor. Typically, to ensure they are providing some kind of financing option to their customers, dealerships will either partner with a creditor or have an arm of the business dedicated to credit. Financing your car this way does work a little differently.

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Car financing is a secured means of credit. This means that the loan agreement will be secured with the vehicle as collateral, meaning that if you default on your payments, the creditor will repossess or take back your car. Unfortunately, there are a couple of downfalls to this means of credit.

The creditor will own your car until the full amount is completely paid off. Being late on payments can result in you losing your car and source of transport. Many are uncomfortable with this, because they are worried about losing their car if they cannot keep up with their finances or if something unexpected comes up.

There are different options for secured car financing though:

Hire Purchase – This is the simple version of the secured loan that has been explained above, wherein the consumer will not own the car until they have fully repaid it. Typically, hire purchase credit has quite a bit of flexibility as the customer can choose how much money they want to put down as a deposit. This will affect the size of the monthly repayments and could ultimately reduce the cost of the loan in the long term.

A downside to this is that if a customer does not have the money for a deposit readily available, typically those from low income background or who are shopping for a vehicle on the budget end of the market, are unlikely to have large sums of money to put down as a deposit. This results in a premium or ‘poor penalty’ as monthly repayments make the cost of the loan more expensive.

Monthly repayments will be regular and fixed, helping customers to budget more easily. In turn, if you are using hire purchase credit directly through the dealership, you might be in a position to negotiate the price of the car!

This might be a suitable option if you are looking to finance your first car, as it will help to establish a credit profile which could secure affordable credit in the future.

Personal Contract Purchase – This is an agreement similar to a hire purchase in terms of its structure. Customers can pay a deposit and then pay back the value of the car over a set repayment term. Typically, this is anywhere from one year to five years.

At the end of the agreement, the customer has options. At this point, if the customer wants to, they can trade the car in for an upgrade or a new vehicle, utilising the equity they have in the current vehicle. Alternatively, the customer can pay a balloon payment to take ownership of the car.

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Balloon payments exist because customers who use personal contract purchase credit will have a much smaller monthly repayment. This means so many customers opt for it as it appears like a more manageable cost, but realistically, it can be an extremely unaffordable way to buy a car. More often than not, if the customer has not saved up for the cost of the balloon payment when it is due, they will be pushed into upgrading or training in their car.

However, personal contract purchase is a smart way of buying cars if you are likely to chop and change your vehicle. Yet there are sometimes a lot of caveats for this kind of credit, including mileage limits and hidden costs if you decide to trade the car back in at the end of the term. It can work out to be a much more expensive way to buying a vehicle.

Save Up & Pay Cash For Your Car

There’s not too much to know about saving up money to buy a car, except that it might be difficult and unrealistic, especially on a tight budget. We can’t schedule and anticipate everything our lives no matter how hard we try, and if your car breaks down a year before you expect to change, you might not have the available finances to buy a suitable replacement.

It’s extremely important to not make financial mistakes if this does happen to you, including:

  • Over stretching your finances – If you have been saving up and you cannot wait to buy a new car, (either because you get too excited or because of circumstances beyond your control), it’s extremely important to still stick within your budget. Committing to paying too much money for a car (even in cash) can leave you short of money and in a more harmful financial situation than you were before.
  • Using short term credit to bridge the gap to pay cash for your car – if you are only a couple of months’ worth of savings away from the amount you need and you want to expedite getting a new car, you may be tempted to use a payday loan. This can be an extremely expensive way of accessing credit with APRs of over 1000%. These financial products have their place and can be beneficial in certain circumstances, but they are also renowned for preying on low income or vulnerable consumers.



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