Cash, loan or contract? Financing your new car

Buying a car, whether new or used, is one of the biggest purchases you’re likely to make, so it’s important that you finance the deal correctly. The decision about how to finance your new vehicle will depend on whether you want to bear the brunt of the cost upfront or whether it makes sense to spread out the payments over a certain period of time. There are a number of options available, and it’s important you understand how they work and how much money you’ll end up paying.


In an ideal world, we’d all pay for our new cars in cash. It’s a straightforward transaction and is the usual method for buying second hand cars privately. Car dealers like it because they receive their money upfront. As a cash buyer you have negotiating power and may be able to haggle on the price or persuade the dealer to give you a few added-in extras.

However, there’s nothing to stop you using a debit card to pay for your new car. It works the same way as cash and means you don’t have to visit the bank and draw out a large amount of notes. The advantage of using a debit card over cash is the protection it offers if things go wrong. Check the small print regarding your card issuer’s disputes process to ensure you’re covered before going ahead with the purchase.

Dealer Finance Deals

Your car dealer may try to sell you a finance deal and while it’s worth looking at what’s on offer, it’s advisable to refrain from making a decision straightaway because it may not be right for you. Options offered will probably include hire, lease and personal contract purchase agreements and part exchange deals.

Part Exchange

If you have a car to sell, part exchange is a hassle-free way to dispose of your old vehicle. It works by the dealer taking your old vehicle either as payment or part payment towards your next vehicle. Any outstanding amount will be made up, either in cash or by using another form of finance. The price you’ll be offered will be a trade price, so you may not get as much as you would if you sold your car privately. It’s always worth trying to sell it yourself first.

Another option is to take out a hire purchase agreement directly with the dealership. The cost is paid for in monthly instalments with an agreed rate of interest. A deposit is usually required, and the loan is secured against the vehicle, so you won’t take over ownership until all the payments have been received. A Hire Purchase agreement is usually set up directly with the car dealership. It is an agreement where the purchase price of the car and agreed interest is paid back by monthly instalments. This type of loan is secured against the car, so you won’t own the car until all repayments have been made. Usually, a deposit is required.

A similar but usually less costly option is a personal contract purchase. Instead of paying back the entire cost of the car, the agreement only requires you to pay back the difference between the original price and the price when it’s resold. At the end of the period of agreement, usually about three years, you have a number of options. You can either pay the difference and take ownership of the car, but this could be a substantial amount, hand it back with nothing more to pay or start the process all over again with a new vehicle. Lease purchases work in exactly the same way, but you won’t have the option of returning the car once the contract ends.

Financing cars without the help of a dealership

Banks and building societies will often offer good deals on car loans. Purchasing new cars is one of the most common reasons for taking out a bank loan. Whilst it may seem more complicated to go to your bank rather than have the car dealer arrange it, the rates can be very competitive. It’s worth comparing the banks’ APR (Annual Percentage Rate) against the dealership offer and if necessary, have a go at haggling. Also, if you have been a loyal customer to the bank and you need to change your repayment arrangements in the future, it may be possible to renegotiate the terms.

Credit Cards

It may seem foolhardy to put such a large amount on a credit card, but if you agree the monthly repayments with your provider, there’s no reason why you should pay any more than you would through a finance deal. Unlike some finance deals, you will be able to pay the full amount back early. Make sure you stick to the agreement; otherwise, you could face hefty charges. As with debit cards, credit cards will offer protection in the case of a dispute with the dealer.

There are plenty of options available to finance the purchase of such an important item. Whatever method you choose, make sure you do your homework, understanding exactly what you’re signing up for and how much you’ll be paying.

Thank you to Edwin Miles, Underwriting Manager at for contributing this informative guide