Best way to finance buying a car

Best way to finance buying a car

Buying a car is no simple decision. From buying outright to buying a car on finance, there are many options. You also have to consider running costs. In fact, it’s probably the second most expensive thing you’ll buy – after your home. So it’s important to make sure you choose the best way to buy a car for you.

Why should I use cash or savings when buying a car?

Use our Car costs calculator to work out the total cost of motoring.

The cheapest way to buy a car is to fund all or part of it in cash.

This is because you’ll have to pay interest on any loan or finance agreement.

If you decide to use cash, remember:

  • Make sure you have enough savings left over for an emergency after you have paid for your car.
  • If you don’t have enough savings to buy the car in full, use what you can afford to put down the biggest deposit you can.
  • Even if you use money from your savings you might be better paying for some of the car on your credit card so you benefit from credit card purchase protection – putting just £100 of the cost of the vehicle means the card company is jointly liable with the retailer if something goes wrong. You should pay the bill off in full the next month.

Buying a car using a personal loan

You can get a personal loan from a bank, building society or finance provider if your credit rating is good. You can spread the cost over one to seven years.

Make sure the loan is not secured against your home. Otherwise you’ll be putting your home at risk if you fail to keep up with repayments.

Shop around for the best interest rate by comparing the APR (or annual percentage rate, which includes other charges you have to pay on top of the interest).


  • Usually the cheapest alternative to buying with cash.
  • Can be arranged over the phone, internet or face-to-face.
  • Covers the whole cost of the car (but it doesn’t have to).
  • You can get a competitive fixed interest rate if you shop around.


  • You might have to wait for the funds to be paid into your bank account but some lenders make funds available almost immediately.
  • Other borrowing might be affected.
  • Monthly costs can be higher than with other options.

Hire purchase (HP) to finance a new car

Hire purchase is a way of buying a car on finance, where the loan is secured against the car. You’ll need to pay a deposit of around 10%, then make fixed monthly payments over an agreed time period.

This means you don’t own it until the last payment has been made.

Hire purchase agreements are usually arranged by the car dealer, so are convenient to arrange and can be very competitive for new cars, but less so for used ones.


  • Quick and easy to arrange.
  • Low deposit (usually 10%).
  • Flexible repayment terms (from 12 to 60 months).
  • Competitive fixed interest rates.


  • You don’t own the car until the final payment.
  • Tends to be more expensive for short-term agreement

Getting a car on finance: things to look out for

Make sure you get the most for your current car, whether you’re part-exchanging at the dealership or selling privately.

The more you make on it, the less money you’ll need to raise for your new car.

When you compare car finance deals, there are a few key things to do before making a final choice.

  • Make sure you can afford the monthly payment, not just now but for the whole term of the loan. Our free budget plannercan help you work this out.
  • Ask the firm offering you finance what happens if you struggle to pay one month, and what options would you have if you could not afford to pay.
  • Compare the total cost of borrowing, including all charges over the full term of the loan.
  • Beware of early repayment or other charges, such as charges for exceeding the forecast mileage in personal contract purchase plans and personal leasing.
  • Compare interest rates by looking at the APR (annual percentage rate), which includes all the charges you have to pay. Remember a bigger deposit will usually mean a lower interest rate.
  • Think carefully before buying payment protection insurance (PPI) or other insurance, such as GAP cover, which can be expensive and might give limited cover. GAP cover is designed to pay out if your car is a total write-off and the outstanding finance is more than the value of your car.
  • Will you be able to afford the car’s running costs on top of your monthly payment? Use our Car costs calculator to work out actual running costs and whether you can afford them.

Using your savings is the cheapest option for buying a car, while personal loans are usually the cheapest way to borrow to buy a car, but only if you have a good credit history.

If you have a bad credit score, you might need to choose one of the alternative financing methods to buy a car.


Sujatha was named one of the Top 100 Influencers In Social Media (#41) by Social Technology Review. She is currently a senior creative content strategist at Oracle Marketing Cloud. She is also a member of the Editorial Board for the Journal of Digital & Social Media Marketing. She provided informative articles on various topics like Business, Marketing & Advertising, Conference & Summits, Finance, and Investment & Insurance

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