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How to pay for a car
Buying a car is a large financial commitment, so consider your budget and options carefully.
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There are benefits to saving up to buy the car you want outright:
- As a cash buyer, you may be able to negotiate a better deal.
- You won’t have monthly repayments and interest charges to worry about.
- You could sell the car in future and keep the proceeds.
However borrowing could be another option if you:
- Need a car now and don’t have time to save.
- Want to keep your savings as a buffer to cover future expenses.
- Would lose higher interest paid on savings, e.g. from an ISA.
- Can borrow at a low interest rate.
- Want extra protection on credit card purchases.
Of course there’s a middle ground, where you could use savings to pay a deposit towards a car, covering the remainder with credit, helping to keep your borrowing and interest to a minimum.
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If you’re over the age of 55 and have been contributing to a pension, you may be able to access a tax-free lump sum from your fund, using that to buy a car. However, it’s important to consider the future impact of this, leaving you with less income when you are older.
You should speak to a fully qualified pensions adviser, regulated by the Financial Conduct Authority, before deciding whether taking funds from your pension is the right thing to do.
If you're planning to use credit
When you apply for credit, lenders contact their preferred credit reference agencies to check your credit record. This may highlight any potential risks associated with offering you credit, and can influence the interest rates and any amount of credit you’re offered.
All lending is subject to an assessment of your circumstances.
With any form of borrowing, fees and interest may apply. To limit these costs, you should only borrow what you can reasonably afford to repay, over the shortest possible term.
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Depending on your needs and how long you plan to keep your car, there are finance options you might like to explore when buying a car through a registered dealership.
Hire Purchase (HP)
With a hire purchase plan, you’ll make fixed monthly payments over 1-5 years, and at the end of your agreement you’ll own the car outright, so long as you’ve made all of the required payments. There are no mileage limits to worry about.
Personal Contract Purchase (PCP)
PCP plans offer lower monthly payments over 1-4 years, with the option to return, exchange, or pay a lump-sum at the end of the agreement to own the car.
The value of the car may also be guaranteed, subject to return conditions and mileage limits.
Dealers often have finance options available, but it’s always worth shopping around.
Try our car finance calculator
With car finance, it’s important to know that the lender buys the car on your behalf and owns it for the duration of the finance agreement. If you miss repayments, the car can be taken away.
You may not be able to buy a classic or a very old vehicle using car finance, so other credit options may suit you better if that’s your situation.
If you’ve already got car finance elsewhere
You could transfer your existing car finance to lower your monthly repayments, or spread the cost of a lump-sum payment at the end of your agreement. Just know that early settlement fees may apply.
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A personal loan could give you the flexibility to buy from a dealership or private seller. If your loan is approved, the money will be sent to your current account. You may be able to borrow more than the cost of the car to pay for extras if you wish.
Once you’ve paid the dealer or seller, the car is all yours, with no mileage limits to worry about.
A personal loan could offer you a fixed borrowing amount of at least £1,000, over a term to suit your budget – typically 1-7 years. At the end of that term, your loan will be repaid in full, so long as you’ve made all of the necessary payments.
If interest rates are fixed your monthly loan repayments will be too, making it easier to keep track and understand your borrowing costs.
Other lenders may offer personal loans with variable interest rates. If you choose one of those, just be aware that your monthly payments could change over time.
You may be able to make overpayments on some loans without incurring early repayment charges, which could reduce the term and amount of interest you pay overall.
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Subject to the credit limit available, a credit card could be a flexible way to pay the deposit for a vehicle, or purchase a lower-value car outright. However, it’s important to consider borrowing costs, including interest fees and other charges, over the period you hold a debit balance.
Not all car dealerships will offer the option to pay by credit card, so it’s worth checking first.
An introductory or promotional rate could offer low or even 0% interest on card purchases. However if you are unable to repay your balance before any offers expire, your standard interest rates will apply to your outstanding balance, which could significantly increase your borrowing costs, making a credit card less viable as a way to purchase and spread the cost of a car.
Note also, if you miss a payment or go over your agreed credit limit, you could lose any promotional or introductory interest rates. If you do use a credit card, it’s important to manage it carefully.
Much like a personal loan, by paying with a credit card you’ll own your car from the start, but there’s less structure around your repayments, which could make it harder to budget, especially if you go on to use the credit card to make further transactions.
Unless a 0% interest rate applies to purchases, to avoid paying interest on purchases, you need to pay off your statement balance in full and on time every month.
You can repay as much as you want when you’re able to, or as little as the minimum payment each month. Just be aware that if you only pay the minimum, it’ll take longer and cost you more to clear your credit card balance.
Where the total purchase price is over £100 and up to £30,000, credit card purchases will usually be covered by Section 75 of the Consumer Credit Act 1974.
On selected cards you may be able to request a money transfer, moving funds from your credit card to your UK current account. This could be handy if the dealer or private seller you’re buying a car from doesn’t accept credit cards – just make sure you’re buying from someone you feel you can trust.
It’s important to know that a transfer fee may apply, and purchases made using cash, debit cards or bank transfers won’t be covered by Section 75.
Before you make payments to anyone from your current account, it’s worth making sure the payment details are genuine. There’s a form of fraud, where emails including bank details are intercepted and changed by criminals, so you unconsciously send funds to the wrong account. This can be avoided by making a simple phone call, or requesting a printed invoice including the correct payment details.
Refer to our fraud hub if you’d like more information about protecting yourself.
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If you use an overdraft on your current account, you could be charged daily interest, defined in the terms and conditions of your account.
Some banks and building societies will allow you to use an unarranged overdraft, however your credit score could be negatively impacted if you do.
Instead, you could apply for an arranged overdraft on your current account. You’ll only be charged daily interest as and when you use it.
It’s important to know that the amount you can borrow with an overdraft may be more limited than other types of credit and, if you use the full amount, you won’t have that safety-net to fall back on in the short-term.
An overdraft may not be the most cost-effective way to manage long-term borrowing. Rather than the purchase price of a car, which may take considerably longer to repay, an overdraft could help you to cover short-term costs, such as unexpected car repairs.
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You may be able to ask for a further advance on your existing mortgage, or remortgage with a new lender to borrow against your home in order to make a significant purchase, such as a car.
However, this could depend on:
- Whether your lender will allow you to add to your mortgage for this purpose.
- Your age and whether you’d be extending your mortgage into retirement.
- Your personal circumstances and the health of your credit record.
- Whether you can afford additional repayments.
- How close you are to paying off your mortgage.
- The loan to value ratio for your property.
When interest rates are low, you may consider borrowing more on your mortgage to pay for a car. However, it’s important to consider the impact of future changes in interest rates and your personal circumstances.
Because your mortgage is secured against your home, it may be repossessed if you don’t keep up with your repayments. That in itself may be a reason to choose an alternative borrowing option.
As a general rule, you should limit any borrowing to the period over which you’ll own the asset. That way, you’re less likely to end up repaying debt on an asset you no longer have. This should also help if you need to borrow again in future, for another car or large expense.
The typical duration of a mortgage is 25 years, although in the UK you may be able to get a mortgage for anything from 6 months to 40 years. Your borrowing costs over a long period could be significant, even at a low interest rate.
To limit your costs, you should only borrow what you can reasonably afford to repay, over the shortest possible term. Another borrowing option may be cheaper over a shorter term, even if the interest rate is higher.
You must seek support from a mortgage adviser before you apply to borrow more or change your mortgage in order to buy a car, especially as a car is likely to go down in value over time. You should explore all financing options to find the one which suits your individual circumstances.
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Usually only available to homeowners aged 55 and over, you may be able to release tax-free cash in order to buy a car, whilst staying in your own home.
This generally takes the form of a loan, secured against your property. You won’t have to pay anything until you pass away, or move out of your home into long-term care.
Before deciding on whether equity release is right for you, you should speak to a qualified adviser. They will be able to explain what’s involved and tell you about other options. We can put you in touch with a Scottish Widows Later Life Lending Advisor, or you can find a qualified adviser through MoneyHelper and the Equity Release Council.
Understanding the cost of a car
Whether you’re looking to buy your first car, upgrade to something newer, or switch to an electric vehicle, considering the ongoing costs might help to inform your decision making.
Fuel
The cost can vary between fuel types, but also some cars are more economical, depending on engine size, the way you drive and your typical journey distance.
Car tax
This can be more expensive, depending on the amount of CO2 an engine produces and the value of the car itself. Low emission electric vehicles currently offer the lowest car tax rates.
Tyres
Within a 4-year period, a car could wear out a full set of tyres, so you may want to factor that into your budget. Specialist, large and slim-profile tyres may cost more to replace.
Insurance
Before you get behind the wheel you must be insured. Options range from third party cover, to fully comprehensive. You may need to shop around each year to find the best deal.
Servicing and MOT
A service can highlight issues before they become bigger problems, and ensure that your vehicle is roadworthy. Regular servicing may also be a condition of your warranty. According to The AA, an interim vehicle check could cost between £75 and £125, with a full-service costing £150+, excluding any necessary maintenance or parts. An annual MOT is a legal requirement for cars over 3 years old, with costs from £30-£125, depending on the vehicle you’re having tested.
Depreciation
Most cars will lose value over time. You can minimise depreciation by keeping your car in good condition, maintaining a service record and minimising your mileage.
Repairs
Some car parts may need to be replaced due to normal wear and tear, including lightbulbs and wiper blades. But if something bigger goes wrong, parts and labour could be expensive. New and dealer approved used cars may be covered under warranty for a period of time.
Breakdown cover
New cars may come with cover for a period of time. Otherwise, for peace of mind, you may want to arrange cover for roadside assistance in the event of a breakdown.
Consider all of these factors, and what you can realistically afford to spend on a new or used vehicle, in advance of making a purchase.
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