Buying your first car is a big financial commitment. Apart from property purchase it may be the biggest financial commitment you have ever made, and as such you may not be familiar with the wide-range of ways to buy available to you. Buying your first used car needs careful planning and it's important to consider all the options to determine which method of finance is right for you.
As you prepare to make this investment, here are the ways in which you can fund the purchase of your used car.
Cash or savings
If you can afford to pay for your new car outright, then it's possible to do so and in some cases, is the cheapest method. However, if you tie up all, or a large part of your cash reserves, it can leave you exposed if there were to be an emergency. Buying with cash is a great way to ensure that you stick to whatever budget you have set yourself and that you don't make a bigger financial commitment than you can afford. It also means that your commitment to pay for the vehicle is finalised on the day you take ownership.
- Pros: Paying with cash helps you stick to your budget.
- Cons: Waiting to save for a vehicle can take a very long time and can when purchased exhaust your reserves.
Hire Purchase is a finance product that Carbase offers. It is an extremely popular way to purchase a first used car as it allows you to budget accurately thanks to fixed interest rates and monthly payments. Essentially, it does what it says on the tin - you make monthly payments to hire the car until the end of your agreement when provided the payments are completed you will own the vehicle. As it stands approximately 80% of all purchasers borrow the funds from somewhere to secure the vehicle. A Hire Purchase gives you additional rights in the event that there is a dispute with the dealer or should your circumstances change. These rights will be explained in full by one of our finance experts should you require.
Our hire purchase arrangements can be tailored to you and your budget by adjusting the length of your agreement (usually from 1-5 years) and the amount you pay as an initial deposit. Typically, the deposit will be around 10% of the total value of the car but in some instances, it could be more or you could even come away with your new vehicle having paid no deposit. It's really flexible and if your circumstances change and it turns out you can afford to pay more, you can settle your agreement early without any penalty or indeed make lump sum reductions.
However, if you don't keep up your monthly payments the car may be repossessed as it remains the property of the finance company until you make the final payment.
- Pros: Spreading the payment means you might be able to afford a better car sooner than buying outright.
- Cons: You don't own the car until the final payment and could lose it if you don't keep up with monthly repayments.
Personal Contract Payment
Personal Contract Payment (PCP) is a great finance option which not only gives you affordable monthly repayments, but also several options at the end of your agreement too. As you are effectively moving a proportion of the monthly payments to a lump sum at the end the term payments are significantly reduced enabling the purchase of a more expensive car than you might otherwise have thought possible. At the outset the PCP agreement is adjustable to your needs in terms of the amount of monthly repayments, annual mileage, deposit and the final payment amount. As with hire purchase you can also settle your agreement at any time. The same additional rights and protections apply to PCP as to HP.
At the conclusion of your PCP agreement you will have three options. The first is to make the final payment which is known as the Guaranteed Residual Value of the vehicle. Once this is paid you will take full ownership of the car. It's important to note that under a PCP agreement, the final payment amount is worked out at the start of your agreement and is guaranteed by the finance company so you will know, from the offset, how much this payment will be. The second option is to decline to pay the final payment, return the vehicle to the finance company at no extra cost and just walk away. The third and final option is to part exchange the vehicle at the end of your agreement and use any equity from the vehicle being handed back to begin a new PCP deal all over again.
- Pros: You have fixed monthly payments and multiple options at the conclusion of the agreement with reduced monthly payments.
- Cons: The car remains the property of the finance company until you make the final payment.
There are a wealth of credit cards available nowadays, many which offer 0% interest for a specified period of time. This means that if you use a credit card to purchase your first used car, and then pay it off before interest is applied, you won't pay any more than the cost price of the vehicle. Websites such as Money Saving Expert have good lists of the current credit card deals available. However, there are a couple of things to consider before taking out a credit card. In most cases, you will need to undergo a credit check to get a card. If you haven't got a large financial history - for example, if you are young - then you may find the credit limit imposed on the card is not sufficient for you to be able to purchase a car. If you do choose to purchase using a 0% credit card, it is vital that you pay the outstanding debt off before interest is applied, as interest on credit cards can be much higher than that on other forms of borrowing, such as Hire Purchase and Personal Contract Payments. Fees are payable based on any balance payed on a Credit Card as levied by the provider of the card to the retailer
- Pros: Predictable monthly repayments potentially with 0% interest
- Cons: Your credit history might mean you don't get sufficient credit. Interest can also be very high.
Many banks and building societies offer personal loans for purchases such as buying a car. Again, these are allocated following a credit check so the same limitations as with a credit card may be evident. Loans are typically offered over a fixed period of between one to five years with monthly repayments required and interest added each month. Personal loans can be either secured or unsecured. Secured means that the bank can repossess things, such as your home, if you do not keep up your repayments. Unsecured doesn't require any collateral, however the interest rates are then higher. Furthermore, personal loans generally have higher Annual Percentage Rates (APR) than the financial packages offered by dealers, making them a more expensive way of borrowing money. Utilising personal loans can in some instances limit the availability of additional funding from the provider, normally your bank.
- Pros: You arrange the loan yourself, allowing you to choose who you borrow from.
- Cons: You could limit your ability to borrow any further funds from your bank.
Payday loans, by their very nature, are designed for short-term borrowing: essentially bridging a gap to get you to the next payday. Due to their short-term nature the interest rate applied to them is extremely high. As such it is strongly advised not to use such a loan to pay for a large purchase like buying a car. Doing so could mean your debt grows considerably day by day.
- Pros: In terms of buying a used car, there are none.
- Cons: Payday loans are not designed for such a large purchase.