It doesn’t really matter whether you are purchasing a brand new or second-hand vehicle, substantial sums of money will be involved and you’ll probably need some sort of financial assistance to make the deal possible.

The good news is that in today’s market car buyers typically have a significant number of different financial options open to them.  Here we will be looking at those and discussing their pros and cons.

 

True, perhaps not many buyers have the luxury of having sufficient capital reserves in their bank to enable them to simply write a cheque for the vehicle they are purchasing.

Even so, it might be the case that you have had a sudden windfall and some spare cash is now sitting in your bank account.

• Pros. It’s fast, easy and car dealers may be willing to negotiate more on the asking price if they know you can pay immediately from your own financial resources. You also won’t need to convince anyone of your creditworthiness in terms of a loan and you will be the owner of the vehicle the moment cash is exchanged etc.  
   
• Cons. A better use of your cash may be to use it to pay off any expensive debts you are currently living with such as credit card bills etc.  This involves a little mathematics and looking at things like how much interest you are paying on other loans versus what sort of other deals might be available to finance your car acquisition. 

In summary, paying cash for your vehicle isn’t always necessarily the best use of your money - so think carefully before doing so.

 

Using plastic is certainly quick and easy.

Providing you have sufficient credit limit on your card, it is a perfectly workable option.

• Pros.  Little effort is involved and if you already have sufficient credit, so no form-filling formalities and credit scoring checks will be required. The car will be yours immediately. 

If your credit card is offering a 0% interest deal for a long enough period of time to enable you to repay the amount without charge, this can be a cost effective way to fund your purchase.

• Cons.  Typically, credit cards are amongst some of the most expensive ways in the market to borrow money.  The interest rate you will be paying on your purchase is likely to be high. As some credit card transactions can involve the merchant accepting the credit card company’s charges, you may find that this inhibits your ability to negotiate a great deal with the car dealerships. 

In summary, this might be a solution that is open to you but do remember to do your sums carefully and work out how much you are likely to be paying in interest over the realistic amount of time it will take you to pay off your debt. 

 

HP is familiar to most of us and at one time was perhaps the most common form of financing for purchasing expensive items such as cars, furniture and jewellery.

It basically works on the basis of paying a deposit and paying back the finance company on a monthly basis over an agreed period of time.

• Pros.  It is a form of borrowing familiar to many and that includes car dealerships.
   
• Cons.  You are effectively borrowing money and using the car as security against the loan.  The vehicle is not yours until you have fully paid off all instalments. You cannot sell it until you have repaid the loan. If you don’t keep up the repayments, your vehicle will be repossessed.

This might be a car finance solution worth taking seriously if you are certain that you will be keeping your vehicle for a significant period of time in the future.

 

PCP is a funding option that involves an initial payment then a series of set amount monthly payments over an agreed period. – typically three years, though this does depend on the individual manufacturer or dealership.

Once you’ve completed those, you’ll have the choice of either giving the vehicle back and ending the agreement or making a final larger payment to purchase the car outright. That final payment is called the Guaranteed Future Value (GFV) or sometimes the “Balloon” payment.

The GFV is defined at the start of the contract. It’s based upon a number of factors including the projected market value estimated upon its mileage at completion and how much your initial payment was.

• Pros.  If you’re not sure you will want to keep the vehicle over an extended period of time, at the end of the initial phase you can simply give it back.
   
• Cons.  At a first glance, it can seem a complex option - though in reality it isn’t. If you decide against keeping the vehicle, your existing payments to date won’t have been invested in acquiring an asset - they’ll simply be gone. 

You may also find that if you do decide to give the vehicle back, you will be liable for extra charges, such as damages (eg. body work scratches, or if you have gone over the pre-agreed mileage etc)

In summary, if you don’t like the thought of committing to the purchase of the vehicle over the longer-term, PCP just might be worth considering.

 

Contract hire finance is sometimes rather confusingly also called PCH for Personal Contract Hire.

Although there are some legal differences between leasing and rental, to all intents and purposes you are basically renting the vehicle concerned.  You won’t have to pay a deposit and if you select the fully maintained option, the only costs you will need to pay out for are your insurance and fuel. 

The finance company will typically cover all other costs including servicing and road tax.

At the end of the agreement, you just hand the car back.

• Pros.  This option can provide you with the peace of mind of knowing that you aren’t liable for servicing and maintenance or road vehicle licencing.  Typically, you won’t have to find an initial deposit.
   
• Cons. You will never own the vehicle. So, as such, your monthly payments are not being partly offset in financial terms by you having an asset at the end of the day.

As with PCP, you may be liable to extra charges when you hand the car back.

If you like changing your vehicles regularly and you don’t like the uncertainty of the financial exposure that can come with car ownership (e.g. breakdowns) then contract hire finance might be an option for you.

 

Many car dealerships will be very keen to offer you some sort of car finance or another.

That’s because they will make commission on the sale of the finance and that will add to their profit margins on the deal overall. It isn’t possible to be too specific on the details as, in reality, the finance offerings may vary from one dealership to another.

• Pros. This is one-stop shopping as you can source your vehicle and finance at the one location.
   
• Cons. Car dealership loans should be looked at closely in terms of their overall costs, as these may be high relative to other options in the marketplace. Sourcing your finance from an individual dealer may also mean that you are obliged to buy a vehicle from them, thereby restricting your degree of choice as to model and make.  It may also be harder for you to drive a good deal on the purchase price if the dealer is also providing your finance.   

If you have a less than perfect credit history, you may find that a dealership will not accept you for a loan.

This may be an option worth considering providing you assess it objectively against other options open to you and are aware that the car dealer may be working as hard to sell you the finance as they are the vehicle. 

 

These are specialist brokers of car financing deals.  You can visit the site of a leading provider, Carfinance247*, to get an idea of their options and services.

Basically, unlike some other financing options (such as bank loans), they are not tied to a single source of finance and will search the marketplace for you in order to help find a cost-effective and suitable lender.  There may be able to help you secure finance even if you have a less than perfect credit history.

• Pros. An approach which maximises your chances of finding a suitable car finance package for your needs, taking into account affordability and your requirements for the vehicle. This might save you a huge amount of hard work trying to do the same job yourself in the car loans marketplace and having someone searching for you will ensure that the offers you receive will be competitive.  

You are also free to choose the car you want from any dealer nationwide, meaning you are not tied to one dealership.

• Cons.  None really. Sounding out their service would involve you in no commitment and you can simply review the offers you get to see if they are suitable for you, as well as take advantage of their online tools such as a loan cost calculator.

Car finance brokers might be a very real option for you by virtue of their independence and choice.

Whatever solution you decide to go with, do remember that borrowing money is a serious business. Always make sure you can comfortably afford the repayments and look at potentially protecting those repayments with income insurance cover and other relevant insurances.