Financing a New car can be an expensive affair - there are 3 main options available to you with regards to credit. You can choose a personal loan from a bank or building society, a hire purchase loan or a personal contract purchase plan.

Loans

Lenders will usually give you a loan for any reason; you borrow a sum of money in advance, pay for your car and then pay instalments back to your lender. You can choose to take out a secured or an unsecured personal loan - secured are usually cheaper but most lenders require homeowners who will offer their house as security.

Loans are a good option when buying a car as you will be treated by the car dealer as a cash buyer which allows you to choose where to buy your car and enable you to negotiate the best price. Loans are also a great option as you own the car outright from the beginning - meaning you can choose to sell at any point if you need to.

Hire Purchase

Hire purchase is a little more complicated than a loan but in simple terms, you pay a deposit to the lender and then you pay a fixed amount of money for a set period of time and after this period you own the vehicle.

Hire purchase loans are a great option for many as they are very easy to acquire and in many cases the rates of interest are cheaper than with personal loans. One of the main downsides with hire purchase however is that you don’t own your car until you have finished making the repayments – you can therefore not sell the car until you have covered the full cost with the lender.

Personal Contract Purchase

Personal contract purchase plans are thought to be more complicated still and are normally offered on new or nearly new cars. This is how the plan works - you pay a deposit to the lender and you then agree to pay fixed monthly premiums for around 3 years.

At the end of this period, you have 3 options - the first is to pay a premium called the Guaranteed Minimum Future Value - this amount will have been agreed before signing the plan. If you pay this premium the car is then yours. The second option is to hand the car back to the dealer - this means you pay nothing more but you do not get your deposit or any of the monthly repayments back. The third option left to you is to part-exchange your car - your car will be valued after the 3 years and if it is worth more than the guaranteed minimum future value that was initially agreed, the dealer will put the excess towards a new car.

Personal contract purchase plans are an excellent option for those wanting to regularly change their car and are a great way to upgrade your car every two or three years - monthly repayments too are often cheaper than with personal loans or hire purchase. Things to be aware of however is that the car still belong to the dealer until the plan is fully paid off again meaning that it cannot be sold - you may also find that you have to pay a penalty if you want to leave the plan early.