There are so many types of credit these days that it can become quite confusing trying to work out which borrowing option you should use for which purpose. Emergency bills might require small amounts of cash quickly and so a payday loan or an overdraft may seem suitable. Large payments, like for home improvements, are more likely to be covered by a personal bank loan or a credit card. However, when you buy a house, you will probably take out a mortgage, and property for a business will usually be purchased through a business loan.
When it comes to cars, the options aren’t so black and white because the cost of a car can vary hugely based on the model, how old it is and if you have a car to trade in. Plus, it will depend where you’re buying the car from. Dealerships are able to take payments in the form of credit and sometimes offer their own car finance to help you manage the cost, whereas buying a car from a private seller will mean providing the cash upfront.
Obviously, we aren’t car sales assistants or finance advisors so we can only offer suggestions and pointers when it comes to buying a car. It’s not just the cost of the car you have to consider when embarking upon the car buying journey: you must factor in road tax, MOTs, car services and insurance, as well as things like general maintenance and car upkeep.
For this reason, it’s worth finding out what extras the dealer can offer you (free of charge, if possible) when you buy the car. If you use the dealer’s leasing options, you usually benefit from free MOTs and services for the length of the contract which can save a fair bit of dosh over a few years. Usually, these options mean paying interest on your borrowing and passing a credit check so they might not be options for everyone.
Some dealers will also offer what’s known as a part-exchange or part-ex. This is when you trade in your old car to offset the cost of the new one. Obviously, if you’re driving around in an old banger that’s barely hanging on, they might not offer you anything. It’s therefore worth considering the value of the car in scrap (usually around £250 for really run-down vehicles) or even breaking the car for parts. It can be sad if the car is sentimental, but any extra cash you can make from selling your old car will help towards the costs of the new one.
When buying a car from a private seller, you won’t get any of the benefits that might be included when buying from a dealer. But there is one main advantage and it’s that buying from a private seller is usually much cheaper than buying from a dealer. Plus, you might have better luck haggling the price as a private seller won’t have the same margins to meet that car salespersons do.
There are things you have to think about regardless of where you buy the car from or what type of credit you use. For example, if you buy an expensive car then getting new parts like windscreen wipers or replacement rims will be expensive too. You also need to think about the grade of tyres the car needs – it’s not detrimental to the vehicle, but some cars drive better on certain tyres and some cars have such advanced technology that basic, cheap tyres could actually be dangerous.
Newer cars tend to have cheaper road tax and electric vehicles currently cost nothing to tax as part of the government’s scheme to encourage people to ditch petrol and diesel cars in favour of more environmentally-friendly options. Road tax can be anything from £0 to £2000 for the year.
An MOT is an annual vehicle test where important parts on your vehicle will be checked to make sure they meet the legal standards and your car must have an MOT to be road legal. The maximum MOT cost is just under £55 however if your car fails its MOT, then depending on the issue, the repairs can be costly.
Options for financing a car include:
PCP and HP are both offered by the dealership and in some cases can be offered at 0% APR so if you’re not bothered about the type of car you buy, then this is a way of buying a new car without paying extra in interest. It does mean you don’t own the car until the last payment is made, but many people use these methods of car finance because paying a little each month can be more affordable than paying one lump sum upfront – especially if your need to buy a new car is unexpected.
The average credit card limit in the UK is between £3000 and £4000, but some banks offer upwards of a £10,000 credit limit which is more than enough to buy a reliable second-hand car. Of course, you need to consider the interest rate on your credit card or overdraft and just because you have a borrowing limit, it doesn’t mean you need to use it all. You must have a rigid budget and plan to repay the borrowing because interest accrues quickly on large sums.
Personal bank loans are usually only available if you have a good credit score or a long-running history with the bank but at a low APR, bank loans are a justifiable way to buy a car – especially if the car is a necessity. You will be required to make specific monthly payments and there may be early settlement charges so make sure you can afford the payments over the full loan term before even applying for a bank loan.
Lastly, however most sensibly, you should try to save towards a new car. Even if you can’t afford to save for the whole cost of the car, saving a large deposit can really help reduce the amount you need to borrow and therefore the amount of interest that will accrue. PCP and HP usually require a deposit to secure the agreement so in some cases, you may have to save the money prior to buying the car. If you know your car might be coming to its end, think about whether you have room in your budget to start saving now, or if it’s worth selling your car before it dies and putting the money towards a new vehicle.
Getting a new car doesn’t need to be complicated but we know financing a car can be. Do your research, only borrow within your means, and always read the terms and conditions of every contract you need to sign when securing the funds for your car.
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For more information on different types of credit and tips to manage your money, take a look at our Info Hub.