You have a number of options available to you when you’re buying a new car. But the reality is that the different options can easily lead to confusion. We begin this article by looking at the different ways that you can finance your car purchase before looking at the pros and cons of applying for your first car loan.
Cash or savings
Paying in cash is one of the best way to buy a car, as you will save money on fees and interest payments. Also, if you fall on tough times, you can sell your car to recover some of your initial investment because you own it outright. What’s more, many dealers offer discounts to cash buyers, so you might get a better deal on the car as a result. Just be careful if you’re using cash, as it’s not a good idea to wipe out your savings entirely just to buy a new car.
Personal contract purchase
Personal contract purchases (PCP) have become popular recently. They allow you to pay a deposit on a car before agreeing to specified monthly repayments for a particular timeframe. At the end of the deal, you can either give the car back to the company, pay a final lump sum to own the car, or part exchange the car for a new one. PCP options are not the easiest way to fund a car, but they allow people who don’t have a great deal of capital to complete a deal. One of the drawbacks of this type of financing arrangement is that the finance company draws up a mileage limit, which restricts how much you’re allowed to use your vehicle in one year.
A hire purchase also allows you to spread the repayments for your car over a longer period (2-5 years). But the difference is that when the period is over, you officially own your car and are not subject to additional payment if you want to keep it. You will also need to put down a deposit for the car in the first instance, which will then determine how much you’re required to pay off over the years in repayments. Interestingly, with hire purchases, because you don’t own the car until the end of the period, the finance provider will have to step in to pay for any faults with the car.
Another good option is to apply for a personal loan from a provider like Koyo Loans. Personal loans are transparent, give you full ownership over the vehicle, and provide you with bargaining power, as you can sell it at any time if you need the money. There are many advantages of receiving your first loan for a car, and we introduce them below.
Pros of receiving your first car loan
- Personal loans enable you to arrange your finances in advance, meaning the dealer will treat you as a cash buyer. You might be able to negotiate a discount as a result.
- You have the chance to spread the cost of repayment over a long period, meaning you don’t have to use up all of your savings to buy the car that you want.
- You can sell the car if your personal circumstances change, which isn’t the case with other financing arrangements.
- When you’re approved for a personal loan, you’re not beholden to one dealer. This allows you to shop around for the best deal.
- When you receive your car, you don’t have to restrict yourself to an annual mileage and can drive it as far and as often as you like.
Cons of receiving your first car loan
- Unlike other types of car finance, you will be responsible for fixing defects yourself. This shouldn’t be such an issue if you’re buying a new car, but it’s important to note.
- You will need to have a decent credit rating to be approved for an unsecured personal loan, so it’s not an option that is open to everyone.
What’s the best way to finance a car purchase?
As you can see, there are lots of ways to finance a car purchase, and a lot depends on your personal circumstances and preferences. Dealers are pleased when you use finance products because they earn a decent commission on these arrangements. However, buying with cash (or at least with cash secured from a personal loan) affords you bargaining power, as many dealers provide cash discounts on certain vehicles. Ultimately, we’d recommend shopping around before committing to a financing arrangement, but opting for a personal loan provides you with the cash upfront and is a great way to remain in control of the purchase.