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How to Buy a Car – Finance Agreements Explained

So, you’re in the market for a new motor. But how are you going to pay for it?

Getting a new set of wheels is a big decision. Scoring high on the feel-good factor, it’s also a big investment – probably the second most expensive purchase after a house.

Unless you’ve come into a cash windfall, the likelihood is you’ll be getting your new car on finance – like the vast majority of drivers. It doesn’t matter whether you’re opting for a brand-new car or a second-hand model, choosing the right way to buy it can save you thousands of pounds in interest.

Here’s a few pros and cons to weigh up before you hit the road.

Hire Purchase (HP)

If you’re buying new, there are some great 0% interest offers at dealerships. The best deals would appear to be on longer finance deals between 36 and 48 months – and you’ll need to pay a deposit of around 10% for a HP agreement.

Pros: Quick and easy to arrange, relatively low deposit, flexible repayment terms, fixed interest rate.

Cons: You won’t own the car until you’ve made the last payment and HP tends to be more expensive for short-term agreements.

Personal Loan

You can get a personal loan from the finance provider for the car dealership, your bank or building society. You can spread the cost between 1 and 7 years.

Pros: Usually the cheapest alternative after cash, covers the whole cost of the car without a deposit and you can get a competitive fixed interest rate if you shop around.

Cons: Your credit rating needs to be good, monthly costs can be higher, and occasionally you wait for the funds rather than an immediate transaction taking place.

Personal Contract Purchase (PCP)

A PCP is like a HP agreement, but instead of getting a loan for the full price of the car you get it for the difference between the brand-new price and the predicted price at the end of the hire agreement, based on annual mileage etc.

Pros: Monthly repayments are lower than with a HP agreement, deposit is usually 10% and you can hand back the car to the dealer at the end of the agreement and walk away or pay a balloon price to keep it.

Cons: Exceeding the mileage agreement can incur heavy penalties, as can excess wear and tear. The car is not yours unless you pay the outstanding balance, and the amount you repay back is likely to be more than with HP.

Personal Contract Hire (PCP)

Otherwise known as leasing, you pay a fixed monthly amount for the car with PCP and maintenance, servicing and road tax are usually included. At the end of the contract you give the car back.

Pros: Fixed monthly motoring cost, no concerns about the car losing value, flexible terms.

Cons: The car never belongs to you, deposit is usually three months rental up-front, and there are additional costs if you exceed the agreed mileage.

There’s a lot to weigh up and the tricky decision about how to pay for your new car is just as important as what it’s going to look like. So, make sure you check out your HPs and your PCPs, as well as your BHPs and your MPGs! Do this, and you’ll avoid any unexpected OMGs.