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How to finance a car

From saving up, to taking out a personal loan or leasing – there are many ways to finance a car.

The best option for you will depend on your own personal financial situation. It will also depend on your plan moving forward and the type of car you’re interested in buying.

Car finance options

Buying a car with savings

If you’re able to pay the whole price upfront, you’ll own the car outright. You won’t have to worry about monthly repayments and can sell the car at any time. Cars can be expensive so you might find your choice is limited, depending on what you can afford. 

One thing is certain, the more you’re able to save before you buy the car, the better off you’ll be. Even if you’re not able to save the full amount, saving some of it will reduce the amount you have to borrow and ultimately any interest you’ll be charged.

Buying a car using a personal loan

A personal car loan enables you to buy a car and then make repayments over a set period. You’ll own the car from the start and once you’re finished making repayments, there’s nothing else you need to do. You can also sell the car if needed. 

The interest rate you’re offered will depend on the loan provider, your credit history and the type of loan you choose.

Use our loan calculator to get an estimate of what your repayments would be, based on the amount you want to borrow and how long you’d like to borrow for.

Hire purchase (HP)

A hire purchase is a way of buying a car (typically a brand new vehicle) on finance, where the loan is secured against the car. You pay a deposit initially (similar to a mortgage) and then pay off the balance and interest over the course of the loan. 

Once you’re finished making your loan repayments, you own the car. However, until that point, the car is owned by the finance company and they can choose to repossess it if you miss any repayments.

Personal contract purchase (PCP)

Similar to a hire purchase, you'll pay a deposit followed by monthly payments for a fixed period. With PCP, you don’t take out a loan for the full cost of the car like you do with a hire purchase. Instead, you get a loan for the difference between its price brand new and the predicted value at the end of the loan agreement. 

After this, you have a few options:

  • give the car back
  • pay the outstanding balance to keep the car
  • start another personal contract purchase with a different car

It’s important to read the terms and conditions carefully. Some car dealers may charge for excessive wear and tear, and damage, or if you exceed the mileage limit in the contract, which can affect the amount you end up spending. 

Personal car leasing or personal contract hire (PCH)

This is similar to renting a car as you don't get to keep it at the end of the contract. You'll usually have to pay some rental costs in advance and then regular monthly payments. These may be higher, but you may get non-fuel running costs, such as road tax or servicing included.

Can you buy a car with a credit card?

Buying a car with a credit card (either in full or as part payment) can give you extra protection if something goes wrong, under Section 75 of the Consumer Credit Act

However, not every car dealership accepts credit cards. Those who do, typically limit the amount you can pay using your credit card, and some may charge a card handling fee.

Interest rates on credit cards can also be higher than other types of finance and you’ll have a credit limit on how much you can borrow.

Things to consider

As with any loan, it’s important to make sure you can afford to keep up the monthly payments before you enter into the agreement. 

You should also consider ongoing costs such as:

  • insurance
  • servicing
  • maintenance
  • fuel

These can make a big difference to your budget and may impact how much you want to borrow and how you would like to borrow it.

If you’re interested in taking out a personal loan, take a look at the different types of loans available to see what your options are.