How can I pay for my used car?

There are more ways than ever to fund a car, so take time to ensure that you choose the best method for your circumstances and budget. As well as the traditional ways of paying for a used car purchase, there are also methods that can offer cheaper monthly repayments and sometimes even do away with the need for a deposit.

In 2015 1.1 million used cars were bought on finance1 and the numbers are growing. But if you do go down the finance route, as with any loan, there's a price to pay for borrowing the money. The first thing to check is the Annual Percentage Rate (APR), but there may also be one-off fees for arrangements, acceptance or option to purchase.

Here are your choices for financing that used car purchase - some that you can arrange yourself and others that you may be offered by your chosen car dealer.

Buying without a loan

For drivers with enough money in the bank, paying in one go is the quickest way to acquire a used car. Whether you're buying from a private individual or a car dealer, having the money already in your bank account will ensure the deal goes through quickly. But you do have to decide how the transaction will proceed. If buying from a reputable dealer, a BACS payment should do the trick. Private buyers frequently use a reputable escrow account. Be careful if you're buying privately with cash: people carrying large wads of notes to buy a car have been known to be mugged.

Pros: Quick, straightforward; no interest payments
Cons: Your money is tied up in a depreciating asset; carrying cash can make you vulnerable

Paying for a car with a loan

You decide the amount you want to borrow, then arrange it with a loan provider. There are specialist car loans available, but most loan companies are happy to lend for a car purchase. After you apply, they look at your credit rating and financial history to decide whether to lend to you and how much you can borrow. Once you've agreed the loan, how many repayments you need to make and the APR, you take the money, buy your car and pay it back in the agreed manner.

Pros: You own the car outright; flexible
Cons: A proportion of the repayments goes towards the car's depreciation; sum can be limited to £25,000

Buying a car on Hire Purchase (HP)

This is one of the traditional ways of buying a car. Essentially your finance company owns the car. Its price, minus any deposit you've paid, plus interest to borrow the money is then split into monthly payments over an agreed period. At the end of that term (typically four or five years depending on the vehicle's age) you should have paid off the loan and will own the car.

Pros: Regular payments rather than one lump sum; loan secured on the vehicle
Cons: You're paying for the vehicle's depreciation; you don't own it until you've repaid the debt

Personal Contract Hire (PCH)

You are essentially renting the vehicle for an agreed period with the PCH. At the end of the contract, you simply hand it back and make a fresh start. You find the car you want to buy, the finance company inspects it and pays for it assuming they're happy with its price and condition. You then pay a deposit and an agreed monthly fee but at the end of the term the finance company still owns the car and there is no option for you to buy it.

Pros: Servicing can be included in the monthly fee; low monthly rental costs; simplicity
Cons: You can never own the car; penalties for early termination, exceeding agreed mileages and wear and tear conditions can be harsh

Personal Contract Purchase (PCP)

This way of funding car purchases is essentially a mix of HP and PCH. You and the finance company agree your annual mileage and how much the car will be worth at the end of the term, usually three or four years. This is known as the Guaranteed Future Value (GFV).

Along with your deposit the GFV is then subtracted from the car's sticker price. The remainder is divided into equal monthly payments for the duration of the agreement. It means you are effectively only paying for the money the car loses - its depreciation - while you own it. There are three options at the end of the agreement: you hand the car back and walk away, use any difference between its GFV and trade-in value to fund the deposit on another vehicle, or pay off the GFV (sometimes called balloon payment) and own the car outright.

Pros: Cheaper than other finance methods; flexible at end of term; monthly payments tailored to your needs; sometimes you don't even need a deposit
Cons: You don't own the car; if GFV is set too high you have no 'equity' in the car to transfer; penalties for exceeding agreed mileage can be pricy; fees for arranging the PCP

Rather than being intimidated by the many different ways of paying for a used car, view them as an opportunity. There really is something for everyone. Keep your mind open to all the options and you might discover that you can afford a better car than you imagined.


1.Car sales data from Finance & Leasing Association: number of used cars purchased on finance was 1,181,910 in the 12 months to March 2016.



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