Advantages and Disadvantages of Car Finance Options


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Buying a car represents a significant investment – probably the biggest investment you make following a house purchase. For this reason, many people can’t stretch to buying a car outright with cash. But even if you’re not rolling in money you can still benefit from a new car or a good used model. Financial options exist for people who want to purchase a car in stages, or take advantage of a buying scheme that maximises the model you can get for your money. Here are the pros and cons of different car finance options.

Personal Loan

Personal loans only work when you have a good credit rating so you can get a decent interest rate and repayment plan, otherwise it can become very expensive over the long term. The pros of a personal loan are arranging it over the phone or internet, and you can get a competitive rate if you search for it. Cons of a personal loan include the wait you may have for funds to appear.


Hire Purchase (HP)

With hire purchase you put down a deposit – usually around 10 percent – then you pay for the car in instalments until you have paid the entire amount. These deals are quick and easy to arrange, and are normally controlled by the car dealer. You can usually get flexible repayment terms and there are often competitive fixed interest rates. However, the car is not yours until you have made the final payment and this finance plan tends to be more expensive in the short-term.

Personal Contract Plan

This is a good way of financing a new car and it results in you having access to a new model every year or two. At the end of the term you hand the car back to the dealer with nothing more to pay, you trade the car in for a new model and start the finance plan again, or you pay the remainder of the resale price and the car is yours. With this deal you get lower monthly payments, flexible terms, and a choice of what to do with the car at the end. However, the mileage of the car and what condition it is in affects what you pay. Plus, you have an outstanding balance to pay in order to make the car yours.

Savings and Loans

Still wondering, “what’s the best way to buy my car?” It can make sense to use your savings to buy a car because with interest rates so low it is unlikely that a few thousand pounds will earn you much in the bank. It is often better to use savings to fund the cost or part of the cost of a car rather than borrowing at a high rate of interest. Make sure you have some money left over after you buy the car to cover any extra expenses you need to handle right away – insurance payments, for example. Another idea when you have the funds available is to buy the car on your credit card and then pay the amount off in full the next month, so you can benefit from credit card payment protection.