Best Way to Buy a Car in the UK

For the past few weeks, I’ve been looking into acquiring a new car (not actually new but used).

The reason I say ‘acquiring’ is because I wasn’t sure which vehicle financing option to go for.

From Hire Purchase to Leasing, I wanted to understand what they meant and which is better.

From my research, it became clear to me which was the best option for me and my new car:

The best way to buy a new car is by paying it in cash: one payment, no monthly payments.

If you’re thinking of buying a new car in the next couple of years, then start saving up for it.

If you want it sooner, then take out a loan. Not from a bank, but from your friends or family.

In this blog, I want to share all the different types of car financing that I researched in the UK.

I’ll explain what these terms mean and even show you the financial differences between them.

Finally, I will share why I think buying in cash or a family loan is the best way to buy a new car.

Buy a Car using Cash

When you buy a product upfront, then that item becomes entirely yours. A car is no different.

There are many benefits to owning a car outright, not to mention there are no monthly fees:

• Unlike other options, there are no mileage restrictions. You can drive it as much as you want.
• You can do whatever you want to it: modify it, change its colour, decorate the interior, etc.
• You can sell it if you want, it’s your ‘asset’. You can sell it for cash or exchange it for a new car.

However, as with products, it’s a ‘liability’ which means it will lose some of its value over time.

If you know you want a new car in a few years, then start saving up for it in a savings account.

If you’re really financially savvy, then start saving up for it in an investment account/Cash ISA.

Unlike a savings account, an investment account will actually gain interest in it over time.

What this means is that you will actually be using less of your own money to buy a new car!

Buy a Car using a Loan

People take out personal loans for many reasons: home refurbishment, holiday, medical, etc.

The same applies for cars. You can take out a personal loan to pay for your car in one payment.

In the UK, you can expect personal loans with 2.9 – 4% interest from most banks/credit unions.

Also, you are not guaranteed a loan: this will depend on your credit rating and your eligibility.

With a loan, you will have monthly payments. The loan can last anywhere from 3 – 5 years.

You don’t need to pay a deposit or anything, you get the full value of the car as required.

Similar to cash, there are no restrictions with what you can do with the car. The car is yours.

You now have a commitment. Even if something happens, you still have to pay back the loan.

However, that will not only include the initial value of the car, but the added interest on top.

This means is over the course of the loan, you end up paying more than what the car is worth.

Buy a Car using Hire Purchase

Unlike a personal loan, a Hire Purchase (HP) is a type of loan specifically for buying a car.

This type of loan is through a car dealership, as opposed to through a bank or credit union.

Unlike a personal loan, you can expect higher interest rates, in the region of between 4–10%.

Although they are high, people go for these options so they don’t have to deal with a bank.

Similar to personal loans, you can expect Hire Purchase contracts to range from 3 – 5 years.

As a result you will have regular monthly payments during the duration of this contract

However, you will find that the longer the term, the lower the monthly payments will be.

Unlike a personal loan, you can pay a deposit or exchange your car, known as a part exchange.

Over the course of the HP, you are paying down the value of the car plus interest over time.

Once the last payment of the Hire Purchase has been made, then the car is now yours.

Buy a Car using Personal Contract Purchase

Personal Contract Purchase (PCP) are very popular, probably what most people use in the UK.

Instead of paying what the car is worth now, you’re guessing what it will be worth in 3-5 years.

Therefore the amount you pay in total is essentially covering that difference in depreciation.

These are highly flexible plans, from 2-5 years, as well as a variation in interest they offer you.

There is a low deposit, small loan, and you have a decision to make at the end of the contract.

Are you going to settle the amount (pay for the car), enter into a new PCP, or just walk away.

Unfortunately, at no point are you actually owning the car until you make that decision. 

There are mileage restrictions, because this is how they determine the car value in 2-5 years.

If you don’t honour what you say you will do, they will also charge you for the extra mileage.

So not only would you have the car amount, you may have a mileage bill at the end of term!

Buy a Car using Leasing

Leasing is basically paying to borrow a car, in order words, it is the equivalent of renting a car.

At no point are you actually owning the car, you are simply paying just to be able use the car.

There is no big payment to pay, no option to buy at the end, you are simply paying to rent it.

It also consists of a contract (from 2-5 years) and you would have low monthly payments. 

You’d also have to meet certain mileage restrictions, like with Personal Contract Purchase.

However, sometimes they include maintenance, insurance, roadside cover as part of the fee. 

The idea is that they give you all this, with nothing else to think about in this one monthly fee.

The key thing to remember is at the end of the term, 2-5 years, you walk away with nothing.

So you’ve been putting money into it, as if it was yours, but you have nothing to show for it.

This is the equivalent of renting a car while on holidays except locally and on a long term basis.

Worked Example using Cash

Now that you understand what these terms means, it’s time to walk you through an example.

Let’s say that you want to buy a blue 2016 BMW M Sport 3 Series that costs around £16,500.

With cash, it’s pretty straight forward, especially if you have this money in a savings account.

You just pay for the value of the car in cash as a lump sum and that’s it, the car is now yours.

There are no other costs involved in buying the car, other than insurance, road tax, etc.

Now let’s say you were really financially savvy and you were saving your money into an ISA.

Say that you invested £248 per month into a cash ISA over 5 years with a 4% annual return.

That would mean that you invested £14,880 into your account, but now you have £16,500.

That would mean that you could buy a £16,500 car with only £14,880 of your own money.

With cash, you are only paying for the car, and if you were investing, you would pay less!

Worked Example using a Loan   

With a personal loan, you start to pay for more than just the sale value of the car.

Let’s say that you want to buy the same car worth £16,500.

You talk to the bank and they agree to give you a loan for £16,500.

This involves paying £295 per month over 5 years at an interest rate of 2.8% per year.

By the end of the loan, you would have paid £17,685 instead of £16,500, an additional £1,185.

However, there is a better way to get a loan: from the bank of mum, dad, friends, and family!

Sometimes people just have money lying around in their bank accounts not doing anything.

Would if you could ask to use this money to pay for the car and you agree to pay them back.

To make it more enticing, tell them that you will pay them an extra £100 on top as interest.

It’s a win-win scenario: you get the money to buy your car and they get an extra bit of cash!

Worked Example using Hire Purchase

With Higher Purchase, it’s going to be similar to a personal loan, but even more expensive.

Let’s start off again with the same BMW car we want to purchase currently worth £16,500.

As we know, HP interest rates are going to be higher, so let’s take an average of say 8.9%.

Let’s also take out a contract term of say 60 months. This is the equivalent of 5 years.

Unlike a personal loan, the first thing we are going to pay is a small deposit of say £250.

From there, we’re going to have monthly payments of £334 for the duration of those 5 years.

That’s means that by the end of the 5 years, in total, we would have paid £20,279 for the car.

That’s an additional £3,779 on top of the actual value of the car at the time of purchase.

Also, after 5 years, you know that the car is not going to be worth anything near to £16,500!

So as you can see, with Hire Purchase, you are paying to own the car, but at a premium.

Worked Example using Personal Contract Purchase

With a Personal Contract Purchase (PCP), it can be a bit cheaper than HP, but not by much.

Let’s start off again with the car that we want to purchase currently worth £16,500.

Let’s take out a 3 year contract this time instead of 5 years, which is common for most PCPs.

As with HP, we also have to pay a small deposit at the start, let’s say £250.

That means that we will have a monthly payment of around £303 for those 36 months.

By the end of those 3 years, including the deposit, we would have paid around £11,160.

We then have a decision to make: do we buy the car, take out another PCP, or walk away.

Let’s say that we decide to buy the car at its current value after 3 years of around £8,900.

That means that in total, including the PCP, we would have paid £20,060 to own the car.

That’s an additional £3,560, which is more or less the same had we had used Hire Purchase.

Worked Example using Leasing

With leasing, it’s a bit difficult to calculate as you are not actually paying to own the car.

So we’ll see how much it is to just ‘rent’ the car. 

Let’s start off again with the car that we want to lease worth £16,500.

The deposit for leasing tends to be higher. In this case let’s say that it is around £1,750.

Let’s say that we also decide to take out a contract for 2 years or 24 months.

That means that our monthly payment over those 2 years will be £195.

In total, after 2 years, we would have paid £6,420 to lease the car.

However, the car is not yours at this point, you still have to keep paying to use it!

You then have a decision to make as to whether you take out another lease.

Keep in mind, there is no option to purchase the car at the end of the lease contract.

In my Opinion         

As you can see, there are many ways to acquire your next car.

From HP to PCP to Leasing, you can see how it can get quite confusing.

These deals entice people because they get you to pay for your car in small monthly amounts.

However, if you add it all up, you end up paying more for the car in the long term.

In my opinion, the best option is to always buy in cash: just one sum, no monthly payments.

There are no commitments for a certain amount of years, the car is yours from day one.

The next best option in my opinion is to take out a loan.

But not from a bank, but from your own friends and family.

You get to agree your own terms with them, without the pressures of a bank.

And best of all, you get to buy your car from now, as opposed to waiting to save up.

I hope you have enjoyed reading this week’s blog about the Best Way to Buy a Car in the UK.

If you enjoyed reading, check out my other blog: How to Retire Young: A Beginners Guide.

If you have any suggestions for future blog topics, please share in the comments below!