Learn the difference between HP and PCP – and the best ways to drive down the cost
Decide on a budget
The price of secondhand cars has rocketed, rising at “unprecedented rates”, according to the AA – amid a shortage of new vehicles rolling off the production lines. Incredibly, some models now cost more used than they would new. So even if you are going for secondhand rather than new, still make sure you’re not overstretching yourself.
Check on the prices, running costs and depreciation of different models using comparison tools on Parkers, and What Car? Once you’ve decided on a model, Cargiant.co.uk and Autotrader.co.uk are good places to start your search.
Haggle down costs
Don’t pay the list price. Dealers will often be looking to hit targets and may be able to juggle figures to increase their chances of closing a deal. Negotiate using the cheapest online prices, and on used cars haggle over any defects, even if they’re minor. If you want any add-ons, such as a satnav, ask for these to be included as part of the deal.
What Car? lists a “target price” for negotiation on new cars which you should check out before heading to a dealer.
The cheapest way to buy a car is usually with cash. But a 0% purchase credit card can be a good option. You need to repay the debt in full over the interest-free period to avoid charges.
For example, Santander offers 31 months at 0% on its balance transfer card with a 2.75% fee. After the 0% deal ends, the rate is about 20.9% APR.
Paying by credit card gives you section 75 protection, making the card provider equally liable with the dealer if things go wrong.
Taking out a cheap personal loan may also be possible. If you have an excellent credit score, rates on borrowing from £7,500 can be as low as 2.8%.
MoneySavingExpert’s loans eligibility calculator finds deals you’re likely to be accepted for using a soft search that won’t leave a mark on your credit file.
Look at hire purchase
Get hire purchase (HP) or personal contract purchase (PCP) finance directly from a dealer. Or use an online comparison site to search for the best rate and find a car once you’re pre-approved for a deal.
Under HP, you pay for the car and interest over the contract period, and the finance company owns the vehicle until you make the final payment.
Beware of being lured by low monthly repayments on PCP
Under PCP, you take a loan, but won’t own the car at the end of the contract unless you pay a large final “balloon payment”. Alternatively, you can hand back the car, or trade up to a new model and sign up again.
Beware of being lured by low monthly repayments on PCP. These deals typically run for between three and five years, but monthly payments are lower than HP because you’re only borrowing the amount that the new car falls in value over the term, rather than enough to buy the whole car.
For example, a £30,000 model may only be worth £15,000 after three years, so the payments will only cover £15,000.
Matthew Harwood, a car finance expert at Confused.com, says: “HP is the best option, as payments are spread evenly across the term – with PCP, you face paying the lump sum balloon payment.”
Compare finance deals
Compare costs across the whole market before you sign up.
For example, let’s take a Ford Fiesta Zetec 1.0 EcoBoost at an on-the-road price of £12,000 and £0 deposit.
If you have a good credit score, taking out a four-year personal loan at 5.9%, costs £280 a month. The total to repay is £13,461, according to Confused.com.
Under HP, if monthly payments are £291 over four years at 7.9%, the total payable is £13,964 (including a £10 purchase fee). Under PCP, monthly repayments are £218 at 8.9%. The optional final payment after four years is £4,424 to own the car, increasing the total to £14,911.
Check any setup costs and early repayment charges. Erin Baker, the editorial director at Auto Trader, says: “Adjust your deposit and the term of your agreement to get the right balance of upfront expense and ongoing monthly costs.”
Get a deposit contribution
There are a growing number of deposit-free finance deals. But if you do pay a deposit (and you’ll probably get a better rate by doing so), you may be able to get a contribution towards this from the dealer if you take out a specific deal. A deposit contribution is free cash, but compare costs across the market.
Baker says: “Any deposit contribution is typically knocked off your upfront payment rather than the amount you are financing. This can make the cost of a new car more affordable, but monthly payments generally remain similar.”
Rent the car
If you have no desire to own the car, leasing is an option. Also known as personal contract hire, it typically offers cheap, flexible deals – for example you can sign up for shorter terms of only a few months to trial a car.
You can lease a car directly from a manufacturer or through a car finance firm, with many now operating online.
You pay a deposit, and a set amount each month for two to four years. Compare the total cost of leasing deals on manufacturers’ websites if you’re after a particular model, and on comparison sites such as Leasing.com.
But remember, while you won’t take a hit on depreciation, you’ll be left with nothing at the end of the deal.
Ask your employer
Leasing a car from your employer can be much cheaper than buying from a dealership. So check if your workplace offers a company car scheme.
For example, you may be able to halve the cost of leasing a new electric car if your employer is signed up to a work scheme.
Cash in your old car
You’re unlikely to save money by part-exchanging your car for a new one, as the dealer will want to make a profit. If you’re prepared to put in the groundwork to sell privately, check out free listings on Gumtree, eBay and Facebook, or you can pay to advertise on PistonHeads or Auto Trader.
But even though it’s not as profitable, the ease of part-exchanging appeals to many people. “The lack of hassle involved in this option is often worth the small financial hit you’ll take when trading in for a new model,” Baker says.