10 December 2015

Car finance in a nutshell

Don’t fret – we’re not going to suggest selling all your belongings on that well-known online auction website, or washing neighbours’ cars for extra cash, but we thought it might be useful to briefly weigh up the pros and cons of the various ways of paying for a new or used car, after publishing a blog post a month ago on where to actually look to find the right car for you. So, here goes:

Cash – quite simply, it’s king. If you can afford to pay for your new (we always mean ‘new to you’, not necessarily brand new) car outright in one lump, brilliant. There will be no interest to pay and it’s all yours, nobody else’s. Without splitting hairs, cheques and bank transfers fall into the ‘cash’ category, too, as they are all outright payments.

Loans – now’s actually a relatively good time to take out a loan to fund a new car, as interest rates are still being kept at a nice, low level by the Bank of England. A loan involves cash being paid into your account to do what you want with (i.e. buy a car) in exchange for fixed monthly payments, with interest added on. If you borrow £5,000, for example, over a 3-year period (36 months) with interest at 5%, the total loan would come to around £5,385. Divided by 36 months, you’d end up paying roughly £150 per month, and the car is yours from the start. Just bear in mind that all cars, especially brand new ones, lose value (depreciate) over time, so your car will be worth less by the time you’ve paid off the loan.

car finance explained


Credit cards – this method sounds expensive but it’s actually possible to find some credit card deals with really low interest rates for purchases, even 0% in some cases, typically over a maximum of upto 27 months. This potentially means you could pay for the example £5,000 car over a couple of years, paying around £185 per month, without paying any interest. Being eligible for the most attractive credit card rates depends on your credit score, income and other credentials. An advantage of credit cards is that you can choose how much you pay off each month, as long as you cover the agreed minimum payment. Also, consumers who pay for more expensive items with a credit card are often protected if the purchase ends up being a lemon. The downside is that most car dealers add on a 1-to-3% surcharge for credit card payments and again, depreciation means the car will be worth less once you’ve paid for it.

Leasing – also known as ‘contract hire’ or PCH (personal contract hire), taking this financial route means you’ll get the keys to a brand new car complete with a manufacturer’s warranty for added peace of mind, in exchange for an upfront payment (typically called an ‘initial rental’) equating to roughly 3-9 months, followed by fixed monthly payments. These can be as low as £85/month if you lease a Citroen C1 or Nissan Note, for example. Predictably, to be accepted for a leasing deal you’ll need a decent financial record or to provide a guarantor such as a parent. Although the car will be brand new and therefore potentially much cooler, more modern and more reliable than a second hand car, it’ll never be owned by you and is basically just rented for the agreed duration. You also have to stick to an agreed mileage limit each year, which is fine if you mainly stick locally. The upside to leasing is that depreciation doesn’t matter a jot, as you can just hand the keys back at the end of the contract.

car finance options


PCP – stands for ‘personal contract purchase’ and works more or less like leasing or personal contract hire, but in addition to being able to either hand the keys back and walk away at the end of the contract, or start leasing a new car, you can also choose to pay a one-off, larger payment (called a balloon) and keep the car after the initial contract duration. Take the Fiat 500 with insurance I-DEAL, for example.

Hire Purchase (HP) – with competitive interest rates especially for new cars (less so for used), hire purchase allows you to pay a deposit followed by fixed monthly instalments over a period of one to five years. HP is often provided by car dealers and it’s basically like renting a car over the agreed number of years, but you will then own it. Some HP deals allow you to hand the car back once you’ve paid 50% of its value, but the finance company has a lot of control and can take the car off you if you miss any payments, particularly until you’ve paid off a third of the car’s value. Many car manufacturers offer PCP, PCH and HP deals directly on their websites, or you can search for an online comparison broker who can find the best leasing deal for you.

Peer-to-peer loans – cutting out the middlepersons (i.e. banks), P2P loans are found online and the money comes from private individuals looking to make a return on their loans by charging interest. Rates tend to be pretty competitive, more so than from banks, and some peer-to-peer loans allow early repayments and overpayments without incurring penalty fees, but you usually need to have a good credit rating to be accepted.

We hope this brief guide to financing your new (to you) car is helpful. We’re a telematics car insurance company, not financial advisors, so don’t take any of this blog post as gospel – it’s just to paint a picture of the different options that may be available to you. Get in touch on Twitter or Facebook if you’ve got any questions, or want to share your own car finance experiences.

Oliver Hammond

Written by Oliver Hammond

Oliver is an established freelance motoring writer, published journalist and automotive copywriter based in Manchester. He regularly reviews cars and covers events and launches as editor of petroleumvitae.com and his articles appear in various magazines each month. No relation to Richard from Top Gear, he’s got a weakness for luxo-barges, proper 4x4s and oddball cars.