The car ownership guide – ways to own & finance a car

When it comes to buying a car, most of us will experience a combination of excitement and fear. The joy of purchasing some new wheels is mixed with the chance we might make a mistake. But don’t worry, our guide to the smartest ways to buy a car will help you avoid wasting time and money.

A large part of the car-buying dilemma is down to the number of options available, as whichever way you choose to buy a car, there are several pros and cons to consider.

How do you choose when the best solution often comes down to your individual situation? Especially when you might be better picking long-term hire or finance over owning your next car outright.

If you do want to buy your car and own it, there’s also the choice of paying cash if you have it, taking out a personal loan, or signing up for a hire purchase agreement. And that all comes after you choose what you want, and check how much you should pay.

But don’t fear. If you’re struggling to decide how to buy a car, then this guide will help you make the best choice.

In this car ownership guide, we’ll take a look at:

• How to find the right car for your budget
• Best ways to finance your car
• Personal Contract Purchase (PCP)
• Hire Purchase (HP)
• Personal Car Leasing (PCH)
• Personal loan
• Buying outright
• Part exchange
• Smartest ways to buy a car
• Best time to buy a car
• Where to buy a car

How to find the right car for your budget

If you’re buying a new car, then the manufacturer list price is your starting point to find the best deals. Make sure to check for special editions that can add features for less, and any offers which might be available. It’s also worth checking some car news sites for the models you’re interested in to see if that particular design is being replaced soon and might drop in price.

When you’re looking at used cars, then depreciation is the biggest factor linked to what you’ll pay. To get a general overview, average second-hand car prices are available from websites like Parkers and Honest John.  These will give you a ballpark figure to plan with before you get into researching specific cars to potentially buy.

This is also the time to weigh up exactly what you want, and what you need. It might be possible to buy a classic two-seater Ferrari for the price of a second-hand Ford Fiesta. But it’s not the right choice if you need a reliable everyday family car which is cheap to run and repair.

Setting your priorities doesn’t mean you can choose a car that offers some fun and glamour. It just involves being smart and making some compromises. Especially when sporty hatchbacks and estates are both available new and second-hand, for example. And they’ll even be as quick as a late 1980s Ferrari.

Your first priority should be how you plan to use your car. Will you be driving to work each day, transporting the family, or shifting large amounts of stuff? Or are you buying something primarily to have fun at the weekends, or look good on your driveway? It’s important to be really honest about what matters most. And it doesn’t mean your sensible car can’t have a sports package or special edition paint and wheels added to it.

But you can save some money by choosing a smaller, more economical engine, picking petrol over diesel, or a manual gearbox versus an automatic.

When you’ve decided what type of car you need, then you can start creating a shortlist of potential manufacturers and models to choose from. Now is the time to research issues like car make and model reliability, and typical depreciation.

And don’t forget running costs once you’ve got your new car. Your choice will affect your car tax, charges for the London Ultra Low Emissions Zone, insurance and fuel costs, as well as many other things to consider.

The Money Advice Service offers a handy car costs calculator to give you a good idea of how much you’ll be paying during a year of typical use. It even includes the annual fuel cost based on typical mileage.

The final thing to consider when it comes to finding the right car for your budget is whether you consider a warranty will be important.  Most new vehicles come with a manufacturer warranty, but you may want to extend it, or consider buying one alongside a used car. If you’re buying via any form of finance, then specific maintenance requirements might be part of your agreement.

Best ways to finance your car

The main choice in buying your next car will be between paying in full straight away or using one of a number of finance options. If you want to own the vehicle eventually, then one option is to take out a personal loan.

Alternatively, you can split the payments over equal instalments via a Hire Purchase (HP) agreement. This will give you total ownership eventually, assuming you complete the contact period without any problems. But many people now choose lower monthly payments with the option to either buy or return their car via a Personal Contract Payment (PCP) plan.

PCP payments can seem complicated. So, in addition to the summary below, we’ve created a detailed guide to PCP car finance.

But do you really need to own your car? If you’re not concerned about having your name on the V5C logbook, then you could look at a long-term lease via Personal Contract Hire (PCH). It’s worth considering by reading the details below or taking a look at our personal car leasing guide.

The advantages of buying your car rather than using financing are:

• A simple one-off payment with no contracts to worry about.
• The car is now your asset, which means you do what you like with it, and keep all money from selling in the future.
• You can choose how to maintain or modify your car (As long as it meets legal requirements, such as the annual MOT test)
• Buying an older or classic car can actually see it appreciate in value as long as it’s reasonably maintained.

The disadvantages of buying outright, rather than financing your car include:

• You need to have a substantial amount of money available, which isn’t an option for most of us.
• Buying a new car will mean you immediately take the biggest loss from depreciation.
• If your financial or personal situation changes, you’re stuck with your car until it’s sold.

PCP

The Personal Contract Purchase (PCP) has become the way most UK buyers finance new car purchases. Around 4 of every 5 new cars you’ll see on British roads every day are being driven via a PCP deal, despite the fact these agreements have been around for less than 20 years.

Many people are tempted by the idea of getting access to a much higher specification car for their money. But PCP car finance can seem complicated due to the legal and financial terms involved, which can put people off. Or even worse, see buyers caught out by the small print. This can be a problem, especially as the lower monthly payments are offset by a larger, final ‘balloon’ payment if you want to keep the car you’ve been driving.

If you want to investigate personal contract purchases in more detail, it’s definitely worth researching for yourself to find the best rate – you can save a lot of money by identifying a good deal. Below we list some of PCP’s key benefits.

The advantages of PCP car finance:

• Get access to a better car than you could previously afford.
• The flexibility to either pay the final ‘balloon’ amount or just return the keys.
• If the depreciation means your car is worth at the end of the agreement than predicted, you can put the difference towards your next PCP deal.
• Manufacturer PCP deals can include deposit contributions to lower the cost even further.

Disadvantages of PCP agreements include:

• You won’t own the car until the final payment is made. Which means you can’t sell the car and recoup any of your deposit or payments.
• The conditions of the agreement will include how it is maintained (e.g. using official dealers and keeping to servicing intervals), and leave you liable for any damage or loss due to an accident or theft.
• Most PCP plans have fairly strict mileage limits with significant charges if you drive more than agreed. Covering an extra 1,000 miles could see you charged around £100.
• Both the monthly and final payments will be subject to interest rates which can rise and fall with the UK economy and financial markets. Your personal credit rating will also be taken into account.
• If you breach the agreement, you can have the car taken away by the PCP provider. But once you’ve paid more than half of the value, it can be returned earlier than planned under the Consumer Credit Act.

HP (Hire Purchase)

Paying for something in instalments via a hire purchase agreement came into practice before the motor car was even invented. This means most people are familiar with the idea of paying a deposit, followed by a monthly fee, to eventually own an item.

It’s easier to understand than the PCP model, but they share many of the same benefits and problems. This is why the lower monthly fees of a PCP deal often sway car buyers over the more traditional HP option.

One thing HP buyers often don’t realise is that once you’ve repaid at least half the total amount owed, you can terminate the agreement and return your car. This is covered by a clause in the Consumer Credit Act. As long as your car is in good condition, you’ll be able to choose a voluntary termination without penalty.

The advantages of Hire Purchase (HP)

• You can buy a better car than if you needed to pay the total upfront.
• It’s easier to understand than PCP, as there’s no final payment to make. You usually pay a small admin fee to transfer ownership (£100-£200) along with your last monthly instalment.
• Shorter terms under 3 years are easier to find than with PCP, and you can shop between manufacturers, dealers, and online brokers to find the best deal.
•  You’ll get a better deal with a good credit score. But it can also be easier to get a hire purchase deal with a poor financial history than trying to organise a standard loan.
• Your agreement will state the finance provider is jointly liable for faults with your car.

The disadvantages of Hire Purchase include

• You won’t own your car until the final payment.
• Typically, you will need a deposit, although some no-deposit deals and manufacturer contributions do exist.
• The monthly cost will be higher than equivalent PCP or lease deals, while interest rates are typically higher than standard car loans.
• A breach of the agreement will mean your car can be taken away. This can be done without a court order until you’ve paid at least a third of the total amount.

Personal car leasing (PCH)

Most people think of buying a new car rather than simply leasing it. But the option has been growing in popularity for some time. Potential UK car buyers are switching to Personal Contract Hire (PCH) as a way to drive without thinking about buying, selling, or balloon payments.

Just pick the car you want, pay a deposit and the monthly costs, and drive the car until the contract ends. Then hand back the keys. And because you’re not paying to own the car (or have the option), the monthly fees are likely to be much lower than PCP or HP.

It seems very simple, but there are some complications to watch out for. Leasing was typically offered to business customers, so some deals don’t include the VAT cost. And you may incur charges for going over your mileage allowance or incurring damage.

Personal car leasing is also fairly flexible, with no deposit options and new or used cars available. But the only way to end a PCH agreement earlier than planned is to pay the total costs in full, rather than returning the car.

PCH advantages:

• Usually the lowest monthly costs of any financing options.
• Some deals are available with a low, or even zero, deposit.
• Easy to understand as you just hire a car for the agreed time.
• No need to worry about resale prices. Although lower depreciating cars do tend to be better leasing deals.
• You’ll still benefit from any manufacturer warrant, and companies usually provide road tax and breakdown cover.
• Your finance provider will be jointly liable for faults with your car.

PCH Disadvantages:

• You won’t be investing in an asset you can own.
• The agreement will state an allowed mileage and hire conditions with penalties for breaching them.
• A bad credit rating and high APR interest rate can see you pay much more for the car lease.
• Theft or damage can incur a significant cost. It’s important to check if you need gap insurance and if your provider is a member of the British Rental & Leasing Association.

Personal loan

A personal loan can often be the cheapest way to finance a car. Once you have had your application approved by a bank or building society, the money is yours to spend on a new or used car, whether that’s a dealer or private sale. It all really hinges on whether you can find a good interest rate on the financing.

You can choose to fund the whole car purchase or part of it, along with the length of the loan period. The minimum amount available via loans is usually £1,000, and the terms usually start at 12 months, which isn’t typically an issue for car buyers.

Having a good credit history and shopping around will help you to secure the best rates. But it’s worth pausing before taking out a loan secured against your home (if you own one), as missing repayments will risk your house.  But you’ll own your car from day one, meaning you can at least sell it to recoup some money if you have problems paying the loan amounts.

Advantages of personal loans:

• It’s a simple way to finance your car and a flexible one.
• You are free to choose any car, whether new or used, dealer or a private sale.
• The car immediately becomes yours, meaning you can sell it before the loan period ends to recoup the money or buy something else.
• Picking a loan with fixed interest rates means you can plan your payments accurately.

Disadvantages of personal loans:

• Interest rates are often higher than advertised, particularly if you don’t have a good credit score.
• You’re liable for all car ownership costs, including maintenance and repairs.
• Securing a loan against your home can get you better rates, but also means you could be forced to sell it if you can’t repay your loan.
• You aren’t entitled to the same consumer legal rights as finance customers.

Buying outright

Does buying a car get any simpler than handing over the full amount and driving away with your new vehicle? But simple doesn’t always mean it’s the smartest from a financial perspective.

Obviously, you’ll need to have saved the full amount of your car unless you’ve recently won a lottery or come into an inheritance. But before you visit the nearest Porsche or Ferrari dealership, there’s more to consider.

The average cost of a popular medium-sized car in the UK is around £26,500. In your bank or savings account, you will naturally accrue interest on that amount, and it could also be used to fund other investments. Meanwhile, if interest rates are low and your credit rating is good, it’s possible to find a financing deal that costs around the same as your earned interest.

Particularly when you take into account the number of manufacturers offering deposit contributions and 0% interest PCP deals. This means you can potentially save thousands compared to paying the full asking price in cash.

The advantages of buying outright:

• It’s quick and simple. You pay for your car, and it becomes yours.
• Owning your car outright means you can do whatever you want with it.
• No risk of defaulting on any payments and losing your car.
• Can be cheaper if interest rates are high.

The disadvantages of buying outright:

• It can be more expensive than financing due to manufacturer deposit contributions and 0% finance deals
• If you pay entirely by cash, you aren’t eligible for the legal rights you would get by paying via a credit card or financing. Put at least a small amount on a credit card to avoid this issue.
• It means potentially saving a large amount of money which then becomes tied up in your car until you sell.
• Paying outright for a new car means you’ll lose on depreciation from the moment you drive it.

Part exchange

If you own a car and want to replace it, one option is to sell your car privately or via a dealer or online car buying site. Another is to part exchange it towards your new vehicle. This means your current transport is taken by the dealer and the value put against your new purchase.

Trading in your old car can be an appealing option, with around 3.2 million buyers taking the part exchange route every year in the UK. The simple benefit is that it avoids the hassle of having to sell your car online, but the downside is that you’re likely to recoup less value from it than with a private sale or even by using Motorway.

Many more factors go into deciding whether a part exchange deal is right for you, so it’s financially worthwhile to use our definitive guide on how to part exchange your car.

The advantages of part exchange:

• You don’t need to spend time selling your car privately
• If your car is potentially difficult to sell, the speed and convenience is a bigger bonus

The disadvantages of part exchange:

• You’ll normally get more money by selling your old car privately or via an online car buyer.
• Good car dealers have lots of experience in valuing cars and negotiating, which can put you at a big disadvantage.
• A high part exchange value might not save money on your new car – focus on the ‘cost to change’, which is the difference between the two prices. Not just on who offers the most for your old car.

Smartest ways to own a car

After looking through the various options, what are the smartest ways to buy a car? Although a lot of advice will depend on your individual situation, the one universal truth is that doing thorough research before deciding will help you save time and money in the long run.

• Know the price of the new/used car you’re considering by looking at manufacturer sites, a selection of dealers, and for used cars in general, looking at sites like Parkers and Honest John.
• Get specific for your shortlist of cars, and in making sure you get an accurate valuation for your car for a potential sale or part exchange.
• You’ll probably get a better deal on a car that is in stock at a dealer than one which needs to be ordered. So, if you know there are optional extras available you don’t really need, then you can add them as a requirement during the negotiations to tempt the salesman into offering a better deal on the car sat in his showroom.
• Don’t rule out finance, even if you’re planning to pay in cash. Car finance is a major source of income for dealerships, so they may offer a better deal if they believe you’ll sign up for a finance agreement. As explained above, in some cases finance really can be cheaper, but until you sign anything you can walk away without any problems.
• Always run a background check on any used car, or phone to ensure that a dealer has performed one and provided the right details.
• If a dealer won’t budge on price, ask for extras instead. With a requirement to shift stock, you can often negotiate for added value extras more easily than a lower price. Make sure they’re things you actually want or will save you money, such as a higher specification interior, alloy wheels, or a longer warranty.
• If you’re paying by cash, make sure to pay even just a small amount on a credit card. This entitles you to consumer credit protection for the full amount.
• Don’t rush. Unless you’re at a classic car auction bidding on the last remaining example of a vintage automobile, there will always be another opportunity to buy the car you want with the right deal for you.

Best time to buy a car

If you’re not urgently replacing a car due to a mechanical issue, then you can save money by choosing the best time to buy a car.

An obvious cliché, but one based on fact, is that convertible sports cars tend to be cheaper during the cold, winter months. But don’t despair if you want to buy a car which is usable all-year-round.

Many car dealers work towards quarterly sales targets, with sales bonuses encouraging them to get stock moving. Typically, these will fall towards the end of March, June, September, and December each year, but don’t leave it until the last day of the month as any targets will probably have been hit or missed by then.  

Sales targets also mean dealerships will buy and register cars to hit their totals. And then offer those vehicles as cheaper ‘pre-reg’ deals. You can then save from 20-70% from the new price, although you’ll have missed some of the warranty period (which starts when a car is first registered), and the resale value will be lower due to two owners being recorded.

Another benefit of good timing is to check for cars about to be replaced by a newer model. Dealers will be keen to sell the older version (known as run-out models), to make way for the new stock. This means you can save up to one-third of the original asking price if you don’t mind missing out on the latest model year.

To find out whether there are run-out models which might interest you, check car news sites, especially around the time new designs are announced at big car shows, such as Geneva Motor Show in March, and the Frankfurt/Paris Motor Show in September (it alternates between the two cities each year). Sites like Car Magazine and Autocar will have plenty of coverage to alert you to new models.

If you’re not in a rush, you can also time your next car around the depreciation of your current vehicle. The biggest drop will be between 15-35% in the first 12 months of ownership, and by the third year of a new car, it will be worth 40-65% of the original value. This is why many people trade-in their cars after just 1-2 years to keep up appearances and minimise the financial loss.

That trend has largely ended with PCP financing removing the pressure to part-exchange every couple of years, but it’s worth knowing if your car might be about to drop in value – for example, if a new model is coming out, or whether you should buy or sell a diesel car.

Where to buy a car?

Buying a car has changed a lot over recent years. In addition to traditional showrooms and garage forecourts, there are now options of car supermarkets, classified websites, and online car buying services.

Your individual preference will depend on what you value the most, but it’s worth also comparing the other options to see if there’s a better deal around.

If you value customer service in-person, then franchised dealers are worth visiting to take test drives, order particular specifications and give you more comeback if anything goes wrong. But you’ll be limited to specific manufacturers, and prices will generally be slightly higher.

For a wider range, there are a growing number of car supermarkets. As with dealers, you can visit and take test drives on a bigger stock of cars. But your choice will be from what is available right now, and customer service is likely to be more perfunctory.

Online classified sites span the entire range of the car-buying market. You can browse everything from small enthusiast clubs for particular models to the massive range available on sites like Auto Trader. All without leaving your laptop.

If you’re looking for a used car, it’s worth checking for a Used Approved scheme. Offered by most of the big manufacturers via their websites, used approved models are typically relatively new models that have been fully inspected and come with warranties, roadside assistance, and other benefits.

Companies offering used approved schemes include Audi, BMW, Ford, Hyundai, Kia Mercedes-Benz, Toyota, and VW.

Need to sell your car?

Want to learn more about owning, maintaining, and selling your car? Check out more of our guides here, covering everything from Clean Air Zones to car tax, and plate changes to part exchange. 

• Sell my car fast online
• Car depreciation – ultimate guide
• How to part exchange a car: complete guide
• How to sell a financed car