Financing a car – the cheapest options in the UK
Purchasing the vehicle itself is likely to be the steepest cost, but you should also consider other costs like running and maintenance fees, as well as any interest rates or other costs you may be required to pay. Here are the basics on each method of financing a car.
Cash
The cheapest way to finance a car is with one up-front payment. As a cash buyer, you’re able to fund the entire cost of the car immediately, meaning that you’ll own the vehicle outright. Being a cash buyer means you’re invulnerable to any interest rates, monthly loan repayments, or having to repay more on a finance agreement than the car is worth. You can also sell the car at any time.
However, you do have to be able to fork out what the car is worth in one go – which is a lot more than most individuals can afford. It also means you are entirely responsible for any servicing and maintenance costs.
Personal loans
Personal loan rates are nearing an all-time low, and are therefore the next cheapest way to finance a car after cash purchases. With personal loans – or unsecured loans – you’ll borrow a fixed sum which you’ll repay over a pre-determined amount of time (usually one to seven years) and will also pay interest at the same time.
If you have a good credit score, personal loans can be secured with relative ease, and by shopping around and comparing the APR, you can secure a competitive rate. You’ll be the legal owner of the vehicle, so can sell it whenever you want, but monthly repayments of a personal loan can be higher than with alternative car finance.
Finding the cheapest car finance
If neither of the above are viable options for you, there are alternative ways to get a car finance quote and secure a deal that suits you to save money. Be aware that you will likely receive better deals and cheaper monthly payments if you have a good credit score, but you can find a car finance company that will still accept you if your score is less than ideal.
Below we’ll run through three car finance options that are popular in the UK.
Hire purchase agreements (HP)
If you’re struggling to get a cheap personal loan, a hire purchase agreement may be for you. You won’t own the vehicle until you’ve made the final repayment – the car is used as an asset against the loan. As such, if you fail to make your repayments, the lender has the right to repossess the vehicle. A hire purchase differs from other options in this way.
You’ll typically make a deposit of around 10% (although there are no-deposit options) and from then on, you’ll have a series of pre-determined monthly repayments. These can, depending on the agreement, be low monthly payments. If you want to own the car outright at the end of the term, a HP agreement is a good route to take. Repayment terms are flexible, you’ll often be offered competitive fixed interest rates, there aren’t usually any mileage caps, and a hire purchase agreement is easier to be approved for than other car finance.
Personal contract purchase (PCP)
Personal contract purchase is another popular car finance option. If you’re hunting for the cheapest way to finance a car outright, PCP might not suit. But if you’re a fan of chopping and changing vehicles, this option is ideal.
PCP finance deals often have low deposits as well as flexible repayment terms with low monthly payments. That’s because you only cover the cost of a car’s depreciation, plus interest, when paying the finance company each month.
PCP explained
You can choose to own the car at the end of the finance term, in which case you’ll make one final payment. This lump sum is known as the balloon payment, often much larger than your other monthly payments. If you don’t make the final balloon payment, you can simply hand the car back to the dealer with the option of upgrading to another new car.
The key difference here is that lenders know they might be getting the car back. As a result, it’s common for them to impose mileage limits on cars to protect them from excess depreciation in their value. Limits are typically between 5,000 to 10,000 miles per year with additional payments for anything over the agreed amount.
Bear in mind that, although the monthly repayments for PCP can be lower than HP, you’ll often end up paying more overall if you want to buy the vehicle outright. If you exceed a mileage cap or cause wear and tear, you’ll also have to cough up.
Personal contract hire (PCH)
PCH is a way of leasing the vehicle – it’s essentially a long-term rental. Servicing and maintenance fees are included, though you may have to pay for car insurance and road tax separately.
There’s a mileage cap as well as an initial deposit. In many cases, PCH can work out cheaper overall than PCP as you don’t have any option to purchase the car.
With PCH leasing, you hand the car back to the dealer at the end of your finance term. Your repayments are fixed, but payment terms are flexible and you can generally change providers.
How to reduce your monthly payments
Make a larger deposit
A simple way to reduce your loan is by making a larger deposit. This cuts the amount you need to borrow, meaning less money is being spread across the agreement term. It will also minimise the amount of interest you owe your lender.
A larger downpayment also provides more security to the lender, which could get you a better rate on your loan.
Avoid all-inclusive deals
There’s no doubt about it. Paying one amount for your car makes life easier. With some providers, you can pay a single amount for the car, loan, insurance, tax, servicing, maintenance – the lot. However, you’re often charged a premium for the convenience.
If your budget is tight, you’ll typically get a better deal by arranging everything yourself. That means finding your own insurance, paying for tax and keeping up to date with servicing and maintenance to keep the car in a good condition.
Decide what you want earlier
Flexibility is a buzzword when it comes to car finance. But it does come at a cost. PCP deals offer the most flexibility as you get to decide whether or not to actually purchase the car at the end of the deal – having driven it for a few years.
If possible, it could work in your favour to make this decision before starting a loan. If you don’t want to own the car, PCH may be cheaper than PCP. If you do want to own the car, HP is often the cheapest way to pay.
Improve your credit score
Credit scores give lenders an idea of how much risk is involved in a car finance application. If all your bills are fully paid on time and you have a history of lending responsibly, you present less risk, so you could access better deals at a lower overall cost.
Take a look at our article on improving your credit score for more information.
Shop around
Last but not least, it always pays to shop around. Getting a loan or finance is no exception. Whether it’s with the bank or a specialist lender, you should never settle for the first deal you’re offered. Car finance brokers make this easier by comparing lots of deals without you having to jump through hoops over and over again.
Easily navigate the car finance market
Searching the car finance market and securing affordable car finance can feel overwhelming – but it doesn’t have to be. My Car Credit has hundreds of helpful blogs and articles for you to browse through. We also have a large network of trusted lenders to help you find the cheapest way to finance a car for your requirements. try our online car finance calculator to get the ball rolling.
