What Are The Three Most Common Ways To Finance A Car?

Blog post   •   Feb 01, 2011 17:14 GMT

All drivers need to consider purchasing a new car at some point in their lives, whether it’s something that’s planned or it comes up somewhat unexpectedly. You might be driving around in a car that you’ve had for 10 years and you’ve decided that it’s time to upgrade to something more reliable and economical, your current car might have broken down and it’s not financially viable to repair it or you simply might be tired of driving the car you’ve got at the moment. Whilst there’ll without doubt come a time when everyone needs to buy a new car, the problem comes when people begin to look at how they’re going to afford the car.

Some people won’t have any problems and will be able to walk into any car dealership in the country, purchase any model they like and drive away in it having paid cash. Others won’t be as fortunate and will have work out how much they can realistically afford and stick to a strict budget where they can’t go even one penny over.

Fortunately for those people who don’t fall into the first category – which is in fact approximately 80% of the ‘new’ car buying market – there are various options available for you to consider when buying a car. The following sets out the three main car finance options open to the 80% of people who cannot buy a car outright with cash.

1. Car leasing – this is now the most popular way for UK drivers to obtain a car. Hire purchase used to be the most popular by far but the attractiveness of leasing’s low monthly payments, handing the car back to the leasing company after 3-4 years (instead of the stress of selling it) and getting a new car has moved car leasing to the top spot with c. 60% of all car buyers using this option in the first half of 2010. Car leasing is also popular because it makes the more expensive cars more accessible. That is because the more expensive cars (e.g.; BMW, Mercedes) depreciate slowly and when you lease a car you fund the depreciation of the vehicle plus interest and you do not pay for the whole vehicle – just the amount that the leasing company agrees with you at the start of the contract. This means that you can pay as much as 50% less per month for car leasing as opposed to using hire purchase or a car loan.

2. Hire purchase – used to be the most popular form of car finance. It is very basic. You sign a contract to buy the car by making monthly payments over an agreed period (typically 4 or 5 years). You will not own the car until you make the final payment and if you default on your payments the finance company will take the car from you because they own the vehicle.

3. Bank loan –car loans are the least popular way to finance the purchase of a new car (only 13% of people use car loans to buy a new car). This is most likely because a car loan is the most expensive way to finance a car.