What's the best way to pay for a car?

Shopping for a new set of wheels can be really exciting - it’s up there with scrolling Rightmove “for research purposes”. But choosing the right car for road trips, food shops and the school run isn’t the only choice you have to make - you also need to decide how you’re going to pay for your new ride.

Choosing how to pay for your car may not be quite as exciting as actually choosing your car, but it’s an important decision, and you’ll want to get it right. Let’s take a look at your options.

What options are available?

When it comes to buying a car, it’s a bit more complicated than simply choosing between “cash or card” like you would for most other things. There’s a whole host of ways to pay, such as:

• Cash - old school, simple and straightforward. You pay the money to the person or dealership selling the car, and it’s yours. Job done
• Personal loan - you borrow money from a lender, like a bank, and use this money to pay for the car. You own the car outright, and then you pay back the loan, with interest, over an agreed period of time, usually a few years
• Hire purchase (HP) car finance - you pay a deposit, then make monthly repayments for an agreed period of time (usually between two and five years). At the end, you pay a small one-off fee, and then the car is all yours
• Personal contract purchase (PCP) car finance - you pay a deposit, then make monthly repayments for an agreed period of time (tends to be between two and four years). After that you can either hand the car back, trade it in for another car and start a new PCP agreement or pay a lump sum to make it yours
• Leasing - you essentially rent a car. You pay a deposit, followed by monthly payments for a set amount of time (two to five years), and at the end, you hand the car back - there’s often no option to own the car
• Credit card - you pay for the car on your credit card, then pay off the balance. Using a credit card, even if it’s just for part of the payment, gives you extra protection if something goes wrong - we’ll get into this in more detail below

Which is better for new cars?

If you’ve got your sights set on a brand new car, hire purchase (HP) can be a good way to make this affordable, as it spreads the cost out over time. 

If you’re after a new car, and you like to upgrade your wheels every few years, then personal contract purchase (PCP) might be a good option. As well as spreading the cost, you can choose whether to keep the car (provided you pay the lump sum, known as a balloon payment) or start again with a new one at the end of the contract.

If you’re after a new car, but not bothered about legally owning it, then it’s worth exploring the option of leasing - this can be an affordable way to drive a new car, but it does come with some limitations (keep reading to find out what they are!).

What’s best for used cars?

You can get hire purchase (HP) finance and personal contract purchase (PCP) finance for used cars as well as brand new ones, so if you think either of these finance models would suit your budget and circumstances, it’s worth looking into.

If you’re buying your car from a private seller, as opposed to a dealership, chances are you’ll need to pay it in full. That means that car finance won’t be an option, so you’re looking at either paying in cash (that is, savings or money you’ve already put aside, not a literal bag of bank notes), or taking out a personal loan.

Check out our tips for budgeting to buy a used car.

Pros and cons of paying with cash

If you’ve got enough money to hand, and can comfortably afford to spend it on a car, cash is the cheapest and most straightforward way to pay.

Pros

• You own the car straight away - when you pay for the car in full, in cash, it’s legally yours from day one
• You don’t pay anything extra - other than the usual running costs (insurance, tax, maintenance, all that fun stuff), you won’t have to pay any interest or extra fees towards the actual cost of the car

Cons

• It could eat up your savings - it’s a good idea to keep a rainy day fund with enough money to cover three to six months’ worth of expenses. Bear this in mind and think carefully before dipping into your savings and using a big chunk to buy a car

If you don’t have enough cash available to pay for the car in full, you could still use the money you do have to pay for some of it, or to put down a deposit. Putting down a bigger deposit on a car would mean you’d have to borrow a smaller amount to cover the rest of the cost.

Personal loans for car purchases

A personal loan, also known as an unsecured loan, is where you borrow money from a bank or another lender, and use this to pay for the car in full. You then make monthly repayments to the lender, to pay back the amount you borrowed plus interest.

Once you know how much you want to borrow - that is, how much you’re going to spend on your new car - you can compare deals to see what sort of interest rates you could get. 

You can also choose how long you want to take to repay the loan. A shorter loan term will usually mean higher monthly repayments, but you’ll end up paying less interest overall. For longer loan terms, your monthly repayments will be lower, but you’ll pay more interest because you’re paying across a longer period of time.

Your credit score has a big influence on what interest rate you’re offered, and it’s a good idea to use a free eligibility checker so you can see where you stand before you apply. 

If your score is in good shape, and you can get the most competitive deals on the market, a personal loan can be one of the cheapest ways to buy a car, other than paying in straight-up cash. 

If you’re considering taking out a loan to buy your next car, see how it compares to getting a car on finance.

What are the options for car finance?

Car finance is one of the most popular ways to buy a new car - and when we say ‘new car’ we don’t just mean the shiny, brand new, never-been-owned-by-anyone-else kind. You can get car finance for second hand cars too, and it can be an affordable, flexible way of paying for your wheels.

With car finance, you spread the cost of the car over an agreed period of time. But, as well as the actual cost of the car, you also have to pay interest, and the finance company might set mileage restrictions and other conditions that you’d have to stick to.

There are a few different types of car finance, namely:

Hire purchase (HP)

You pay a deposit, then make monthly repayments for an agreed period of time, usually two to five years, to cover the cost of the car. Once you’ve made your final payment at the end of the term and paid a small ‘option to purchase’ fee, the car is legally all yours.

Personal Contract Purchase (PCP)

You pay a deposit, then make monthly repayments for two to four years. Unlike HP, your repayments don’t cover the full cost of the car. You’re paying for the car’s depreciation (that is, the difference between the price when it’s brand new, and the amount it’s predicted to be worth at the end of your contract), plus interest. At the end of the term you can choose to give the car back, swap it for another one, or make a lump sum payment (called a ‘balloon payment’) to own the car.

Car leasing

You pay a deposit, and make monthly payments to use the car for between two and five years. At the end of this time, you give the car back to the leasing company - there isn’t usually an option to own the car.

Credit cards for car purchases

Many of us don’t have enough money set aside to be able to pay for a car outright, and if this is you, then paying for your new car with a credit card could be a viable option. If you pay on a credit card, you’ll need to pay the balance before the due date on your statement, otherwise you’ll have to pay interest.

That is, unless you can get a card that offers 0% interest on new purchases. This could give you a decent chunk of time - as much as 18 months! - before you’ll be charged interest, so if you can pay off the balance in that time you won’t have to pay anything extra. You will need a decent credit score to get an interest-free credit card, so bear that in mind.

Even if you do have to pay interest on your card, it could still work out cheaper than a loan or a finance contract. Some market-leading credit cards come with fairly low interest rates, so it’s worth looking into. Again, your credit score plays a big part in what deals you qualify for, so take this into account and use a free eligibility checker to see your chances of being accepted before you actually apply for anything.

Another benefit of paying for your car with a credit card is that you get some extra protection if anything goes wrong. This is thanks to Section 75 of the Consumer Credit Act 1974 - as long as the car costs between £100 and £30,000, the credit card company will be jointly liable, along with the car dealer, if anything goes wrong. You get this protection even if you only pay a small part of the price on your card - even if it’s as little as £1. Pretty sweet!

Before you decide to pay on a credit card, find out what fees you’ll be charged. Some dealers charge extra fees if you’re using a credit card, and others will only accept payment via credit card if it’s above a minimum amount. So it’s best to check what the dealer’s stance on credit cards is before you commit.

One more thing - have a good think about whether you can afford your credit card repayments. If you miss payments, there will be consequences like late payment fees and marks on your credit report, and if you don’t clear the full amount while you’re still in your interest-free period, your debt could spiral pretty quickly. 

Credit cards can be a great option, but they’re not to be taken lightly - make sure you know what you’re doing and you can manage the repayments before you jump in.

What should I consider when choosing a payment method?

Picking the right way to pay for your car is a personal decision, and it depends on your budget, your preferences, and the kind of car you want to buy. Here’s a few things to think about to help you decide:

• Your budget - how much can you afford to pay as a deposit? How much can you comfortably afford to pay each month? How much wiggle room is there in your budget
• Your credit score - before you do anything, check your credit report to see how your score’s looking. If it’s pretty high, you’ll have a better chance of getting more competitive interest rates. If it’s on the lower side, you’ll likely be looking at higher interest rates. This will help guide you when it comes to the best way of paying for your car as it will ultimately affect the cost of borrowing
• Your preferences - what kind of car are you looking for? Do you want a brand new one, or second hand? Is it important to own the car? Do you prefer to change your car every few years, or stick with the same one for the long haul?

All of these considerations will have a bearing on the payment method that will suit you best.

Which payment method is right for me?

There’s no straight answer to this one - there are so many options available that there isn’t just one ‘right’ or ‘best’ way to pay for your new car. Some payment methods will suit you better than others, but there’s no single right or wrong way to do it.

Ultimately, it comes down to your circumstances and your preferences. Once you’ve got clear on your budget, and the kind of car you’re going for, you’ll be able to make an informed choice about how to pay for your new wheels.