What Are Your Financing Options When Buying A New Car?

Buying a car is a big decision and it’s important that you spend enough time finding the perfect car for a good price. But it’s not just about the car either, you need to work out how you’re going to pay for it. There are a lot of different financing options for a car and they all have their own benefits and drawbacks. You need to think about your own financial situation and try to work out which option is best for you. The problem is, a lot of people don’t really know where to start and they don’t fully understand how all of the different options work. If you’re buying a new car soon, read this list of your different financing options and the benefits of each one so you can make an informed decision. 

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Paying in Cash

The best option when you’re buying a car is to pay for the whole thing upfront in cash. If you can save up the money to buy the car without having to get financing from anywhere else, you’ll save yourself quite a lot of money. Firstly, you won’t have to pay any interest on a loan and over time, those interest payments can really add up. Secondly, most car dealerships will offer a cash discount so you can usually get a better price on the car. Even if you can’t pay the full price in cash, putting down a big deposit and reducing the amount that you need to borrow is always a good idea. 

If you are going to pay in cash, there are a few important things that you should keep in mind. It’s not a good idea to spend your entire savings account on a car and leave yourself with absolutely nothing, because you may need that money in the near future to pay for other emergencies. Only buy the car with cash if you’ll have enough left over as an emergency buffer, otherwise, you could land yourself in some serious financial trouble. Even if you do have the cash to pay for the car, it might be best to put it on a credit card and then pay the balance off right away so you can benefit from credit card purchase protection. 

Cash is the best way to pay for a car but the majority of people don’t have that kind of money lying around, so you’ll need to look into some of your other financing options. 

Trade-In Value 

If your old car is still in relatively good condition and it’s still worth a bit of money, you should consider trading it in. If you trade the car in, you’ll get a significant amount of money to put towards your new car, which makes the cost a lot more manageable. You might find that you have enough cash to cover the cost once you factor in the trade-in value, which is great news. Even if you don’t have the cash and you’re going to take out a loan, trading it in will reduce the amount that you need to borrow so you can pay it off quicker and save yourself some money on interest payments. Trading in isn’t always the right option so you should check out these trade-in tips to see whether it’s a good idea or not, and help you to get the best price for it. If the car is costing you a lot of money in repairs and it’s a bit outdated, it’s worth trading it in. However, if you still owe a lot of money on your current car loan, trading in won’t get you that much money once you’ve paid off the rest of the money that you owe on it. 

Personal Loans

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If you need to borrow some money, a personal loan is often one of your best options. If you can get a loan from your bank or building society, you can spread the cost of the car over an extended period, usually somewhere between 1 and 7 years. If you shop around some different lenders, you can get a good interest rate on a personal loan and it’s usually the cheapest option aside from paying in cash. You can get a loan to cover the whole cost of the car and it’s easy to arrange, sometimes over the phone or even online. However, there are a couple of downsides to getting a personal loan. Sometimes, you won’t get the cash paid into your bank right away so you’ll have to wait a while. The monthly costs are often higher than other options as well, even though the overall cost of the loan is lower. But as long as you can afford the monthly payments, it’s probably your best option. 

The only issue is, a personal loan is dependent on your credit rating. If you have a good credit rating, you should be able to get a loan with a good interest rate quite easily. But if your credit rating is bad, you might struggle to get a loan at all and if you do, the interest rate will not be very good. You may be able to get a better interest rate if you secure the loan against your house but that isn’t usually a good idea because you’re putting your home at risk if you can’t afford to make the repayments. If you’re going to go for a personal loan, it’s best to pay off your debts and spend some time trying to improve your credit rating first so you’ll get a better deal. 

Hire Purchase 

Hire purchase agreements are a way of buying the car on finance but you don’t actually own the car until you’ve made the final payment, up until that point you’re just renting it. You’ll pay an initial deposit on the car, usually around 10 percent, and then make monthly payments until you’ve paid off the rest of the cost of the car. The hire purchase agreements are usually made with the car dealer, so they’re quite convenient and you don’t have to go and find separate financing. A lot of people like to go for a hire purchase agreement because it’s easy to arrange, however, you should shop around a few different dealers to see who is offering the best rate. The payment terms are usually quite flexible, ranging from 12 to 60 months in most cases, so if you want to spread the cost out a bit more, you can. The interest rates are usually very competitive and they’re fixed so you don’t get any sudden price increases further down the line. The only downsides are that you don’t own the car until you complete all payments, which some people don’t like, and they tend to be more expensive if you’re going for a shorter payment period. 

Personal Contract Purchase 

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A personal contract purchase is quite similar to a hire purchase, however, you don’t get a loan for the full price of the car. You get a loan for the difference between the cost of the car brand new, and it’s predicted value at the end of the payment period. At the end of the payment period, you have 3 different options; you can trade the car in for a brand new one and start a new personal contract purchase agreement. Alternatively, you can return the car and pay nothing, then start looking elsewhere for a new vehicle. Finally, if you decide that you want to keep the car, you can pay one final payment, called a balloon payment, and then you will own the car. Just keep in mind that the balloon payment can vary quite a lot so it might be a few thousand but it could also be tens of thousands. 

If you like to update your car regularly, a personal contract purchase is the ideal financing option for you. It’s also good if you’re not quite sure about a car and you want the option to return it at the end of the period if you decide that you don’t like it. You get a low deposit and the monthly repayments tend to be quite low, but the overall total can be quite high. The resale value of the car is also based on an average mileage and if you exceed that mileage, you may have to pay an excess fee. There will also be fees for minor damage like scratches and dents if you decide not to keep the car at the end of the payment period. 

Leasing 

When you lease a car, you never actually own it. You pay a fixed monthly cost for the use of the car, and that includes all of your maintenance and servicing costs as well. At the end of the agreement, you simply return the car and start a new agreement with a new vehicle. That means that you can plan for the cost easily because it’s fixed and any repairs are handled by the dealer. However, there is a mileage limit that you have to stick to and the monthly costs are higher because they include all of the maintenance. 

There are a lot of different options for financing your car and they all have their own benefits, so it really depends on what your financial situation is and how you use your car.