We have all done, visited a car dealership at the weekend and seen that lovely little two seater sports car you have been drooling over since you were a teenager.  You walk round it, opening the doors, stroking the smooth shiny paintwork and breath in that new car smell.  Then you have a heart attack when you see the on the road (OTR) price!

Buying a new car is the second biggest purchase in your life after a home.  Normally I would not recommend buying new due to depreciation, but to be fair to my future guide on buying used cars this guide must be written.  Now unless you are fortunate enough to have liquid cash lying around you are likely to be buying your new car with some finance.  The question is what type of finance?  This guide aims to explain the various types available and whats best.

Hire Purchase Most dealers will offer this as an option for purchasing a car.  A finance company offering the HP will own the car and the consumer will buy it from them over a set period of time.  The consumer will need to put down a deposit of 10-20% but this means lower monthly repayments over financing the whole car.  The consumer will not own the car until the HP company has been repaid in full, and during this period the car can not be sold.

Personal Contract Purchase The consumer agrees to lease the car for a set period of time, for a set mileage.  For example 3 years at no more than 10,000 miles a year.  If you go over the set mileage the you may end up being charged.  The consumer pays a fixed monthly sum over the lease period. Service, maintenance and repair are included in the monthly payments.  Compared to HP the monthly payments are low, but you will never own the car unless at the end of the term you agree to pay the guaranteed future value.  This is calculated at the start of the term and is fixed.  If the actual value of the car at the end of the term is less than the GFV then as a consumer you loose out, if it’s worth more you can use the difference as the deposit on your next car.  If you don’t want the car at the end of the term you can simply hand the keys back and walk away.

Unsecured Loan A Consumer will borrow money from a bank, building society or finance company based on their income and what they can afford to repay.  The annual percentage rate (APR) and monthly payments are fixed, and the loan is paid back over a fixed term.  As the loan is not secured on the car you own the car from day one and can sell it at any time, but you must pay off the loan within the agreed term.  If you do repay the loan early there may be an early repayment charge.  Some companies offer flexible loans allowing you to take payment breaks without incurring a fee.

Secured Loan A Consumer will borrow money from a bank, building society or finance company and the money will be secured against an item of value i.e. the new car or the consumers house.  The annual percentage rate (APR) and monthly payments are fixed, and the loan is paid back over a fixed term.  Usually the monthly payments for a secured loan are less, you can also have longer repayment terms.  If the loan is secured on your car, you must repay the loan before you are able to sell the car.

Now I explained the 4 most common methods for financing your next new car which is best?  I would certainly rule out PCP if you are planning to hang onto the car.  At the end of the term in most cases you will end up paying anywhere upto 20% more than the market value for the car, as the dealers GFV is usually set in their favour.  So in my opinion PCP is one most expensive finance options.

HP is usually open to most consumers but as such it attracts high APR’s which may not be suitable for your circumstances.  HP is particularly attractive to those consumers who get turned down for secured and unsecured loans.  Once again in the long run HP will cost the consumer more than other finance options.

Unsecured and secured loans from banks or building societies are in my opinion the best way to finance a new car.  Simply apply for the money take it to the dealer and pay the cash.  This makes you a Cash Buyer and as such puts you in a strong negotiating position.  You then simply repay the loan over a fixed term at a fixed rate using monthly payments.  Remember to hunt around for the best rates though, typically 5-8% APR from the high street lenders.  Don’t be enticed by the dealer offering unsecured and secured loans, the rates will be high and you won’t be able to negotiate much on the price.