Car Financing Methods and Their Pros and Cons

Buying a car may not be an easy job, especially if you are planning to finance it. If you have money to pay for it outright, it is good, but you need to research correctly if you are looking to fund it. After home, it will be the second most expensive thing to finance, which is why it is paramount to analyze which option suits your budget and needs.

Regardless of the funding option, you are looking for. You need to arrange a deposit size. A good rule of thumb says that you should have a considerable size of the deposit because it will whittle down the cost of your loan.

Make sure that some money is left in your savings account to meet unexpected expenditures after withdrawing cash for the deposit to be put toward your dream car. Various funding options are out there, and all of them have their pros and cons. Make sure that you choose the one that fits your budget.

Personal loans

If you have the right size of the deposit and your credit rating is good, you can plan to take out a personal loan extending the repayments over seven years. Personal loans are generally unsecured loans.

However, you need to confirm your lender that they are not putting you at a secured loan because if it happens, you will lose your car in case you fail to meet your obligation. Shop around before clinching a deal. Compare APR that includes other charges on top of the interest you will pay.


·         Compared to other funding sources, it is considered the most affordable alternative.

·         You can easily arrange because all you need to do is filling up the form. You will get the loan the same day if everything goes fine.

·         You can get competitive interest rates if you shop around.


·         It is not easy to get the loan signed off on. A slight doubt can account for the rejection of your loan application.

·         As these loans are unsecured, interest rates are likely to be higher.

·         It maybe challenging to keep up with repayments along with other debts.

Hire purchase

Hire purchase is an agreement that allows you to pay down the down payment and then the balance plus interest. This is the most common method of financing your car. You will have to pay at least 10% of the value of your vehicle as a down payment.

The difference between personal loans and hire purchase agreements are the latter is secured against your car. It means the dealer has the right to take the possession of the car to liquidate it to recover all money when you fail to pay off your dues.


·         You do not need to pay the deposit more than 10% while a personal loan lender may require you to submit more than this.

·         You will pay fixed monthly instalments over five years.

·         Interest rates are competitive.


·         You cannot own the car until the final repayment you make.

·         You will lose your car if you fail to make repayments.

Personal contract purchase

Personal contract purchase is a mix of personal contract hire and hires purchase. You will make smaller repayments every month, making one balloon payment at the end of the term. The loan size will be the difference between the car price and the salvage value at the term-end.


·         You can either hand back the car to the dealer and pay nothing or make the balloon payment and get the title.

·         Monthly payments are low, and the deposit size does not need to be higher than 10%.


·         If you exceed the mileage, you will end up paying an additional cost.

·         The total amount you pay will be much more than hire purchase.

Personal contract hire

You cannot get the ownership of the car because you will pay for the use of the car until it has covered specified miles and then hand over to the dealer.


·         Fixed monthly costs are easy to manage.

·         You do not need to worry about the depreciation because the monthly cost includes the maintenance cost.


·         The car will never belong to you.

·         The total amount you pay will be much higher than any other funding option.

Getting the best car finance deal is not very easy. You will have to evaluate your financial condition and needs before choosing an option. However, there are circumstances when you need to borrow to fill the gap.

For instance, you wanted to pay out of your savings, and after the purchase, you thought of adding some accessories. While you are shopping around, you lose your job which makes it harder for you to pay out of your pocket. Under such circumstances, you can apply for loans for the unemployed. Carefully decide on the funding option for your dream car.