When people buy a new car, few of them just turn up at the dealership with the cash in their back pocket. Most people need to arrange a loan or finance agreement to spread the costs over a number of years. Here’s a guide to the main options available:
Hire purchase
This is the most straightforward kind of car finance to arrange. The average cost for a hire purchase agreement is between 7% and 13% APR.
To do this, you’ll need to put down a deposit – usually around 10% of the car’s value. The rest is paid in monthly payments, with interest. A hire purchase agreement has an admin fee at the beginning of the term and finishes with an ‘option to purchase’ fee.
The downside to hire purchase is that you’re not permitted to change or sell the car without the lender’s permission. Also, this can be a more expensive option than getting a personal loan to cover the cost.
0% financing
If you can put a decent deposit down on the car – 35-40 per cent of its value – you can opt for 0% financing. The rest of your payments will be interest-free and spread over a number of months.
Be aware that not all cars are available on this kind of financing, and the terms tend to be shorter, so your monthly instalments will probably be higher.
Leasing
If you lease a car, you can change to a new car on a regular basis. You don’t ever own the car, but you shouldn’t have any hassle either. The cost works out somewhere between £100 and £400 per month.
Your payments are set according to the kind of vehicle you choose and the amount of miles you will cover in a year. Hybrid cars will be priced differently to a petrol saloon car, a diesel supermini to a sports car. Some lease schemes include maintenance in the monthly payments.
Leasing requires you to pay for fully comprehensive insurance, which can increase your monthly car bills significantly. You’ll also need to pay for more than one month’s lease at the beginning.
Whichever option you go for, the most important thing is to check you can handle the monthly payments. Miss them and you risk losing your car.
