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How can you pay for a new car?

By raccars Published

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Are you hoping for a lottery win or do you have a plan in place to pay for a new car?

For most people, a new car is the largest purchase they will make after a house - and it can be a complicated process. Fortunately there are numerous ways in which you can pay for a new car.

Buy a new car with cash

A cash purchase will most likely be financed by savings. While the idea of losing your financial safety net can be daunting, bear in mind that with such low interest rates at the moment, your savings may not be really pulling their weight.

Rather than pay a higher rate of interest to borrow money, which would wipe out any earnings on your savings, it may make sense to fund some or all of the cost of a new car with cash. If your savings don't cover the entire cost of the purchase you could at least use them to pay a large deposit amount and so reduce the total amount of interest you will pay on any amount you borrow. Bear in mind that you should still keep some savings in hand for emergencies.

Personal loans

Personal loans tend to be the cheapest way in which to borrow money for a new car or any other purchase, provided that your credit history is clean. Banks, building societies and other finance providers all offer personal loans to good candidates at relatively low interest rates and with relatively few associated terms and conditions - other than an obligation to repay the money, of course!

Secured loans can be cheaper still but you may be risking your home, if you default on any loan secured against it. When comparing loan costs, make sure that you take into account any set up charges as well as the interest rate.

Hire purchase

Hire purchase is a form of loan commonly offered by a car dealer. You will need to pay a deposit, usually about 10 per cent of the purchase price, and pay the remainder of the car cost in monthly instalments. The car itself acts as security for the loan so you don't become the official owner until payment has been made in full.

Hire purchase deals are usually competitive on interest rates and allow for a certain flexibility of repayment. Higher set-up costs can make them more expensive than personal loans for short term borrowing.

Personal contract plan (PCP)

In a similar vein to hire purchase, with a PCP you don't buy the car outright but agree to pay an amount between the original list price and the expected resale value after a pre-determined time period. Payments are made monthly, usually for between 12 and 36 months. At the end of the contract you can return the car to the dealer and leave with a clean sheet, exchange the car for a new model and a new PCP agreement or pay the dealer the agreed end of contract value and keep the car.

These deals sometimes include insurance or servicing and maintenance plans, meaning that your on-going costs are lower, but you have to keep to agreed mileage limits. The total cost can be more expensive than a hire purchase but you do have some flexibility as to what you can do at the end of the contract.

Personal leasing

This is effectively a long term hire agreement, paid monthly and including servicing and maintenance. You never own the car and have to return it at the end of the lease period. Leasing removes the stress of depreciation and ownership costs but monthly payments are usually higher than with other finance schemes.

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