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The Covid-19 pandemic had a huge impact on many areas of our lives. Just one of these was the manufacture of new cars. The closure of car factories and dealerships during lockdown led to a shortage of new cars and a boom in the used car market, which was also fuelled by people looking for cheaper alternatives in the light of economic uncertainty.
But now things have changed, and there is once again a wider choice of cars available. The production of new cars is more or less back to where it should be, and people buying these new cars are also looking to sell their old ones.
So, if you have been thinking about changing your car, now could be a good time to do so.
But if you are buying a car, what is the best way to finance it? There are various options available and it can be confusing to know which to go for.
So in this article we take a look at four of the most usual options for financing a car. We will explore:
The simplest and most cost-effective way to buy a car is to pay the full amount up front. So, if you are in the fortunate position of having the money available to do this, it’s probably your best option.
And if you already own a car, remember that there is currently a good market for second hand cars so make sure that you get the best price for your existing car that you can. You may be able to part exchange your current car for the new car you are buying. But if you are not happy with the deal you are being offered, it could be worth selling your existing car privately first to maximise your cash.
If there is a very slight shortfall between the price of the car you want to buy and the money you have available, you may want to consider taking out a small personal loan to make up the difference. This could work out better for you financially by enabling you to pay for the car outright than have any kind of finance arrangement on your car.
Another option to consider when buying a car is to take out a loan to do this. There are two options here: a personal loan from a lender, or a specific car loan from a bank.
You can apply for a online personal loan from a bank or other financial provider. If your loan is approved you can then do whatever you like with the money. So if you use your loan to buy a car, paying the seller in full with the money from your loan, you will then own the car outright. It is up to you what you do with it, and you are free to sell it at any stage.
But whatever you do with the car, you will still have to continue making repayments into your personal loan until it is fully repaid.
Some banks offer specific car loans, which can only be used for buying a car. They are similar to the Hire Purchase car finance option offered by most car dealers (see next section). If you take out this type of loan, you will only be able to borrow an amount of money equal to the price of the car, less any deposit you are able to provide. The bank will then send the money directly to the dealer you are buying your car from.
You will not completely own the car – so would not be able to resell it – until you have finished making all your loan repayments to the bank.
As we just mentioned, most car dealers also offer various finance options you could use to buy your car. There is usually a deposit required, and this is where you may be able to offer your existing car in part exchange as the deposit.
Most car dealers offer two finance options: HP and PCP:
Hire Purchase is a loan that splits the cost of the car, plus interest, equally over a number of monthly instalments. A typical HP agreement lasts between 12 and 60 months. Once you have made all the repayments, you then own the car outright. But until this point you are not allowed to resell the car because it still has finance owing on it, so technically it does not belong to you.
Personal Contract Purchase is similar to HP but your monthly instalments only cover part of the cost of the car. This can make PCP monthly instalments cheaper than HP, and PCP usually runs for a shorter period than HP: typically 24-36 months.
However, at the end of the PCP term you will then need to make a decision as to what to do with the car. If you like it and want to keep it, you will need to pay a large final instalment, known as a “balloon payment”. This is the difference between what you’ve already paid and the car’s initial value and can be a lot of money. But if you pay it, you will then own the car outright.
Another option you will have at the end of your PCP period is to transfer what you have paid so far into a fresh PCP agreement on a new car. So, in effect, your monthly instalments continue but you will have a newer car instead.
Many PCP agreements include extras such as breakdown cover, road tax, and warranty, but there are likely to be limitations built into the contract such as annual mileage limits.
One other car finance option that you may want to consider is leasing a car from a dealer. This is known as PCH – Personal Contract Hire. With PCH you have full use of the car but no option to purchase it. So the payments you make are only to rent the car, and you will need to give the car back at the end of your leasing period.
A typical PCH contract lasts between 12 and 48 months, and may include road tax and a maintenance package as part of your monthly payment. Leasing a car can be a convenient way of having the use of a decent car with no strings attached, but bear in mind that the money you pay has gone for good and is not being invested in a car that you will have the option to buy.
We hope that this article has given you some helpful information about different ways to buy a new car. And if you need a slight top up to your funds to make this happen, remember that Loans 2 Go offers online loans that may be able to help.
Do visit us here again soon for more financial and lifestyle tips from Loans 2 Go.
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