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The best way to pay for a car: A practical guide

Learn the different ways you fund your next car!
X min
  • Choices include cash payments, finance deals like Personal Contract Purchase (PCP) and Hire Purchase (HP), credit cards, personal loans, car subscriptions, and salary sacrifice schemes for electric vehicles.
  • Paying in cash avoids interest but may deplete savings, while finance options offer flexibility.
  • Car subscriptions are a modern approach offering short-term vehicle access with all car costs included in one fixed monthly payment.
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Have you ever had that dream where you're cruising down a coastal road - maybe in the Gower, or perhaps in South England - wind in your hair, behind the wheel of your perfect car? But then reality hits. How on earth can you afford it?

The best way to pay for a car, you ask yourself. Cash or finance? Hire purchase or personal contract purchase? Credit card or loan?

We've spoken to a few people who have previously opted for car finance deals and shared their experiences. This guide post will also help your car deals search by explaining how to pay for a car. If you're done watching car reviews and ready for the next step, we'll delve into everything from cash payments to salary sacrifice schemes for electric cars.

We promise clarity and an easier route towards that dream drive!

Here's how the different options compare at a glance:

Method Pros Cons
Cash payments

One-time upfront payment.

Full ownership from day one.

No interest or additional fees.

Full control over the vehicle.

Requires a significant upfront sum.

Depreciation of the vehicle's value.

PCP (Personal Contract Purchase)

Monthly payments.

Option to buy at the end of the term.

Lower monthly payments compared to HP.

Flexibility to return, buy, or part-exchange the car at the end.

Might end up paying more than the car's worth due to interest.

Mileage limits.

HP (Hire Purchase)

Monthly payments.

Ownership transferred after the final payment

Spread the cost over time.

Own the car outright at the end.

Higher monthly payments than PCP.

Interest can increase the total cost.

Salary sacrifice

A part of the salary is exchanged for the car payment.

Reduces car cost.

Potential tax and National Insurance savings.

Convenient for employees.

Reduced take-home pay.

Commitment for the contract duration.

Car subscriptions

Monthly fee for car use.

Flexibility to change cars.

All-inclusive payments.

Includes car insurance, maintenance, servicing etc.

It might be costlier in the long run.

Mileage limits apply.

Cash payments for cars: A deep dive

Picking how to finance a car can be like tackling an insurmountable task. But, the benefits and drawbacks of cash payments are simpler than you might think.

Let's unravel this knot together, shall we?

1. Avoiding interest with cash purchases

Paying upfront in cash? It sounds old school, but it could save you from those pesky interest rates that creep up on us when leasing or taking out loans. Think about it - no added costs, just pure purchase power.

You're not only avoiding extra costs but also gaining full ownership rights over your new ride. That means no more mileage restrictions or wear-and-tear charges often associated with finance agreements.

2. The challenges of cash payments

But let's not forget the elephant in the room; saving enough money to buy a car outright isn't always easy-peasy lemon squeezy. Luxury models and high-end electric vehicles carry hefty price tags that require some serious savings efforts.

And what happens after draining your savings account? Well, life is unpredictable – emergencies happen. So splashing all your hard-earned dough at once may leave little cushion for unexpected expenses down the line.

3. Finding Your Balance

Balancing these pros and cons largely depends on individual circumstances, including one's financial situation and personal preferences regarding debt management.

If having complete ownership appeals more than spreading out the cost over several years through leases, then buying outright may be the ideal choice despite the potential drain on the savings account. However, if flexibility is desired and maintaining a strong reserve fund is important, exploring alternatives like car subscriptions might better suit your needs. Consider all factors before committing your hard-earned cash to any investment, especially something as sizeable as an automobile purchase.

Understanding Personal Contract Purchase (PCP)

Don't fret; the fundamentals of PCP are simple and may be just what you need to drive away in a new car. The concept behind Personal Contract Purchase or PCP is quite straightforward, and it might just be your ticket to a brand-new electric vehicle (if that's what you're after).

1. The ABCs of PCP

How does one navigate through the labyrinth that is PCP? It all starts with an initial deposit. The initial payment may vary from a tenth to three-tenths of the automobile's worth. Then comes the monthly payments, which you'll make over an agreed period – usually two to five years.

However, these monthly payments don't cover the entire cost of the car; they merely account for its expected depreciation over the contract period, with a 'Guaranteed Future Value' or balloon payment due if ownership is taken at the end. Instead, they cover the vehicle's expected depreciation during the contract term. What's left is known as the 'Guaranteed Future Value' or balloon payment, which only comes into play if you decide to own the car at the end of the contract.

2. Balloon payment: Your final leap.

This Guaranteed Future Value isn't just a random figure. It's determined at the beginning of the contract based on factors such as mileage and age conditions specific to the chosen model.

At the end of the agreement, you have three options: you can return the vehicle without any additional costs as long as it meets the condition guidelines, you can part-exchange it for another car using any equity above the Guaranteed Future Value as a down payment, or you can make the final lump sum payment, also known as the balloon payment, and become the official owner of the vehicle.

3. Cheers to the perks of PCP

There are perks. PCP lets you have smaller monthly payments than the usual hire purchase deals because it only covers expected depreciation. This means even luxury models have become more affordable. Want to dig deeper? Check out here.

Explaining Hire Purchase (HP)

Hire Purchase, or HP as it's commonly known, is a simple and straightforward method of car finance that is widely used in the UK. It provides an accessible path to owning your dream car.

Imagine breaking down the cost of your chosen electric ride into easy monthly payments - that's exactly what HP does. You put down an initial sum, which can be from 10-50% of the cost of your chosen electric vehicle. Then, you repay the remaining balance plus interest over a fixed term, usually between one and five years.

1. The nitty-gritty of how HP works

No more scratching your head about fluctuating interest rates because, with HP, they're fixed. This means that throughout your contract period, you know exactly how much needs to be paid each month. So, no unexpected shocks or surprises along the way.

2. Taking ownership at the end of the agreement

What sets HP apart from other financing options? Once all payments have been made – including an optional final payment often referred to as 'the balloon' – ownership of the car transfers automatically from the lender to the buyer without any additional fees or charges involved.

This translates into total freedom at the end of the term, where there are no mileage restrictions or concerns about wear and tear; instead, it becomes yours outright, giving you complete control over how you use it moving forward.

3. A peek into the benefits of a hire purchase plan

If life throws curveballs at you, allowing for earlier completion than originally planned, fret not. With the absence of early repayment penalties in case of prepayment, lenders might apply penalties unlike some other types of loans (Citizens Advice Bureau).

This flexibility, when coupled with the stability brought by a fixed rate, makes budget management easier while still providing an opportunity for full ownership faster, should the situation allow for it.

Personal loans: A better alternative to PCP and HP?

Stepping into the world of car ownership? Personal loans might be your best mate. These little financial helpers allow you to spread out costs over a more extended period, making that dream car more attainable.

Car Sloth team tip: In the realm of car financing, personal loans stand as a versatile and accessible option. They can help potential owners bridge the gap between their savings and the price tag.

1. The ABCs of personal loans

Taking out a personal loan entails borrowing funds from a lender, often a bank or other finance company, and repaying it in regular instalments. The amount you borrow is largely determined by factors such as your credit score, borrowing history, affordability and income level.

A great aspect of personal loans is their flexibility with repayment periods. You could pay back within one year or stretch it up to seven years. But remember this golden rule: while longer terms mean smaller monthly payments, they also mean more interest paid overall.

2. All about interest rates & repayment terms

When it comes to interest rates on personal loans, you can choose between fixed or variable options; the former offering steady repayments but potentially at a higher rate than the latter which may fluctuate. Fixed rates keep your repayments steady throughout but may start off higher than variable ones, which could fluctuate over time.

If knowing exactly what's coming out each month helps you sleep at night, fixed-rate personal loans are worth considering. On the flip side, if risk doesn't faze you much and market conditions seem favourable, going variable might save you some cash.

3. Your credit score & personal loans

Borrowing via a personal loan does affect your credit score initially due to hard inquiries lenders make during the application process. But hey – don’t worry too much because these types of finance arrangements can actually boost positive credit history if managed responsibly, i.e., making timely repayments. Plus, as you buy the car outright, the finance isn't secured against the vehicle, and there are no annual mileage limits! 

Car Sloth team tip: Entering the car ownership arena? Consider personal loans as your financial sidekick. They offer a flexible and accessible way to spread out costs, making that coveted electric vehicle within reach. Just remember: while longer repayment periods result in smaller monthly payments, they also rack up more interest over time.

Can credit cards drive your car purchase?

Are you contemplating the optimal way to finance your ideal vehicle? Well, credit cards might just be a solution worth considering. Considering the advantages and disadvantages of this option requires thorough consideration.

Car Sloth team tip: Rewards galore. Yes, certain credit cards do offer enticing rewards like cashback or points on purchases.

The real cherry on top is Section 75 of the UK Consumer Credit Act, which provides protection for any purchase between £100 and £30,000 if something goes awry with your purchase. That’s quite a safety net.

1. Credit card rewards: A sweet deal or not?

Surely, earning while spending sounds exciting but the tricky part is interest rates. The balance you owe could quickly snowball due to high-interest charges unless you clear it within an interest-free period offered by some lenders.

  1. High APRs: With the average annual percentage rate (APR) hovering around 19% in April 2023 for UK credit cards, according to Finder's report, these rates can exceed typical loan rates significantly.
  2. Limited Borrowing Capacity: Remember that maintaining large balances affects your 'credit utilisation ratio', impacting future borrowing opportunities such as loans or mortgages.

2. Avoid the minimum payments trap

If using a credit card seems right up your alley, then beware of falling into the minimum payments trap each month because this could lead to increased debt and potentially years until full repayment due mainly to compound interest effects plus possibly negative impacts upon an individual’s overall rating.

This mode might work well for those confident about managing debts wisely. However, consideration should be given before diving into such commitments without fully understanding the implications.

Car Sloth team tip: Considering using a credit card to fund your car purchase? Remember, it's not all smooth sailing. While you can earn rewards and have Section 75 protection, the high interest rates and limited borrowing capacity could leave you in hot water. Don't get caught in the minimum payments trap - understand what you're signing up for.

Embracing car subscriptions: A new way to drive

Traditional ways of vehicle ownership and car buying are in the rearview mirror. Welcome to the world of car subscriptions, a fresh alternative shaking up how we think about vehicle use! We spent six months with elmo, you can read our review here,

Here's why you might want to consider hopping on this exciting trend:

1. Fancy flexibility? Meet your match.

Have you ever felt stuck in a lengthy car loan contract that seems like it will never end? With car subscriptions, those days are over. These services offer short-term commitments - usually from one month up to two years. This lets you swap vehicles as often as your heart desires (or needs dictate). Some people even consider these short-term subscriptions as extended test drives before they commit to buying from a car dealer. They are more similar to inclusive car hire than car finance agreements.

The best part is most providers let you easily cancel if things change for any reason at all – be it financial shifts or just deciding you no longer need a car.

2. No finance agreements or large upfront payments

Purchasing a vehicle through financing can be a hassle, with large initial deposits and ongoing monthly instalments stretching out over several years. But with car subscription services, there's no need for such complications. Typically, low setup fees combined with manageable fixed monthly payments cover everything from car insurance to maintenance costs.

This means no more unexpected repair bills sneaking up on you since maintenance is generally included along with other essential services like breakdown cover and road tax. It's like renting but even better because it includes much more than just using the vehicle itself.

Remember, though, only some providers will include the same things in their packages (monthly mileage usually varies), so always double-check what's covered before signing up.

The perks of salary sacrifice schemes for electric cars

Considering a salary sacrifice scheme for your next electric car? Exploring a salary sacrifice scheme for your next EV could be the key to making it more affordable than you may have expected.

Here's how it works and why it could be a game-changer for you.

1. The magic behind sal-sac schemes

The concept is simple yet powerful: You agree with your employer to 'sacrifice' part of your gross salary, which then goes towards leasing an electric vehicle. Sounds interesting?

This setup doesn't just let you drive off in a shiny new EV - there are significant financial benefits, too. For starters, you'll pay less income tax and National Insurance contributions, as these are calculated based on your reduced salary post-sacrifice. And guess what? Your employer also saves on their National Insurance contributions. It's a win-win situation.

2. How much can you save with these schemes?

You may be wondering about those juicy tax savings we mentioned earlier - you can expect to save between 30% to 60% off the purchase price. This is usually available to any fuel-type car, even EVs. Here's where things get really interesting.

  1. Your actual savings depend on various factors, such as the cost of the leased vehicle and personal circumstances, including your existing tax band.
  2. If that wasn't enough, going green has its own perks. Because electric vehicles emit zero emissions, so they attract lower Benefit-in-Kind (BiK) rates than conventional cars, offering additional savings over time.

3. Who can sign up to such schemes?

So, who qualifies for these schemes? Firstly, according to UK taxation laws, you need taxable earnings above the Lower Earnings Limit (LEL). After entering into a salary sacrifice agreement, your take-home cash after the discount, shouldn't fall below national minimum wage, or living wage, levels.

Car Sloth team tip: A salary sacrifice scheme might be just the ticket. This lets you give up a chunk of your gross pay to lease the EV, which cuts down on income tax and National Insurance contributions. But remember, you'll need earnings above the Lower Earnings Limit and an employer who's on board. It's not only a step towards going green - it has more benefits too.

The bottom line

So, there you have it - the rundown on how to tackle car payments. What is the best way to pay for a car? Paying with cash can be advantageous when buying cars. However, finance options like Personal Contract Purchase (PCP) or Hire Purchase (HP) offer flexibility and affordability.

Cash may be king for some, but don't forget about finance options like PCP and HP. They can offer flexibility without draining your savings.

If you fancy spreading costs over time, a personal loan or credit card might suit. Just watch those interest rates!

Ever thought about a car subscription? It's worth considering if you need more than commitment. And let's not overlook salary sacrifice schemes for electric cars - they could give big tax savings!

The best way to acquire an ideal car in the UK depends on your circumstances and requirements. But now you're armed with knowledge. That dream drive is one step closer!

Are you ready to spend time searching the car market for available vehicle loans? We recommend comparing the latest monthly vehicle subscription deals before heading to a car dealership! 

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