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  5. Different methods of financing your next car or arranging a car loan

Different methods of financing your next car or arranging a car loan

Many people in the UK take out a car loan to finance the purchase of their next car, which allows them to drive away a "new" car without having to save all the full price of the car in advance. There are so many convenient and affordable car finance options available to UK residents that you no longer need to think about getting an older car that needs constant repairs. You can get a cheap car loan to buy a decent car that is safe and reliable and pay a monthly loan repayment.

There are so many car finance options available form a variety of lenders offering you car loans at different payment periods and interest rates that anyone looking for a car loan would be understandably confused on choosing the car finance deal that is right for you. Some loans can be costly in the long terms, whilst other loans have a load of complicated finance terms.

On this page we have included some of the popular ways of arranging a car loan, as well as some finance options you may not have thought of. Some of the terms used are explained further in our dictionary of car finance terms. You should also check out our tips and warnings to make sure you get the best loan deal with the cheapest payments and avoid any problems or unforeseen charges.

Getting a personal loan
This is a popular and convenient method of financing a car. You can buy the car with cash and can negotiate to get a good deal on the car. You may be also be able to take advantage of other offers or discounts that are only available to cash buyers. This also avoids your car being repossessed if you are not able to keep up repayments later. Personal loans may have lower interest rates than manufacturer schemes or hire purchase loans, but special low interest rate deals are less common. You can get the loan in a number of ways:

  • Borrowing from a bank or other financial institution - The most popular method, but you might get more benefits if you apply for a simple car loan.
  • Borrowing from friends or family. Worth considering if you are able to, and you can avoid paying interest on your borrowings.
  • Extending your mortgage. If you are a home owner, you may be able to extend your mortgage to cover an extra loan. You will pay a very low interest rate, but it will take a long time to finish paying off the debt.
  • Arranged overdraft or credit cards. This is only worth considering if you are short of cash, now, but will be able to pay this off soon after buying the car. The interest rates are high, but if you can repay the loan quickly, then it's worth considering.

Getting a car loan
This is another form of getting a personal loan, but has some advantages and disadvantages. You may get extra benefits such as insurance or breakdown cover included or discounts on car related services. Some car loans may be secured on your car so your car may be repossessed if you stop making the monthly loan repayments.

Hire Purchase
This is a very easy form of car loan to arrange. You agree to pay a fixed monthly amount and get to drive away the car immediately. You don't actually own the car until you have paid for it in full. If you miss out any loan repayments, your car can be repossessed.

Personal Contract Purchase (PCP)
This is different to the hire purchase arrangements. You agree to pay a fixed monthly payment for a set period of time. At the end of the period you can either give the car back and walk away, or pay the "balloon payment" and keep the car. The monthly payments are lower than with hire purchase finance, but you don't get to keep the car at the end without a large payment at the end.

Manufacturer's deals or interest free finance
Some dealers and manufacturers offer interest free finance on cars. These are often limited to new cars and certain models. You will normally be asked for a large deposit too. Your choice may be limited, but if the car suits you, then it's better than getting a car loan. You might lose out on other benefits or a discount, but again this might be offset by what you gain by not paying interest.

Getting a Company Car
You might lose a little on your tax benefits, but getting a company car is still a good option for many people. There are benefits for the company too as they will be able to offset some of the cost against tax and VAT. We cover this more in the page on getting finance for a company car.

Part Exchange your existing car
If you have an old car that you want to get rid of, you might get a better deal from a part exchange than selling it elsewhere. The dealer might give you a better deal with a part exchange in order to sell you a car, so give it a try.