How should I pay for my car?

ONCE IT was a simple case of saving up or taking out a bank loan. Today there is a multitude of ways to finance buying your ideal used car, from a personal loan to the now popular approach of part-funding through a PCP deal.

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Personal loans

In the past, a loan from the bank was the traditional way to buy a car. And for consumers on good terms with their bank, it can still be a convenient approach. There are two types of personal loan: secured and unsecured. Be wary of the former because, in all likelihood, your loan debt will be secured against your house, putting your home at risk if you fail to repay the loan. The interest rate can change during the term of the loan, too, making it harder to budget.

An unsecured loan is the better option. There’s less danger of your home being taken from you and the interest rate is fixed for the period of the loan. Look up the best deals in The Sunday Times’s Money section. Check lenders are quoting the APR, the annual percentage rate of interest plus any associated fees such as the arrangement fee, as distinct from the more commonly advertised and, because the figure appears to be about half the APR, favourable-looking flat-interest rate. The longer the loan period the more you’ll pay over that term for the loan, and always know the total amount payable over the term of the plan.

Hire purchase

It sounds like it belongs on the table at the local cafe, but HP is one of the most popular ways to buy a car and most dealers can provide the facility. You borrow money from the lender (a finance company, not the dealer) to “hire” your car from them until it is fully paid at the end of the term. At that point, you pay a small “option to purchase” fee (typically £50-£100) to own the car. Throughout the term you are the registered keeper, responsible for insuring and maintaining the car. You can settle the agreement early by paying the outstanding balance and the option-to-purchase fee. There may be a partial interest charge, too. The lender should disclose all charges in the documentation that you sign.

Dealers earn commission on selling you finance via an HP deal and often have room to adjust the interest rate — always ask when negotiating. Incidentally, some people who cannot afford their HP repayments may try to sell their car — or more accurately the finance company’s car — without revealing its finance status. Used-car buyers should insist on a vehicle credit history check by an agency, for evidence of outstanding finance, theft or severe accident damage — a service provided by most reputable used car traders.

Personal contract purchase

PCP is a deferred purchase scheme where you fund only a proportion of the car’s purchase price with the option at the end of the term to pay the balance and own it, trade it in for a new one, or hand it back and walk away with nothing more to pay. It is typically available on new and nearly new cars.

Because the cost is partly calculated on the residual value of the car at the end of the finance term, it pays to choose a slow-depreciating model, and always check that any mileage limitation suits your driving: fees will apply if you drive further than agreed over the term of the contract.

Credit card

The good news: a credit card carries additional consumer rights, as both the card company and the retailer are jointly responsible if your car is faulty. The bad news: you must be able to pay off the balance quickly and have a sufficiently high credit limit to suit the car you’re buying. It’s vital to pay at least the minimum repayments, and to pay down the debt as quickly as possible. The canny consumer will take advantage of lenders charging 0% interest, but either make sure you settle the debt by the end of the promotional period, or note its end date so you switch in time to another 0% lender.

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