How to buy a car on finance

These days, most car buyers borrow money to pay for their car, rather than paying for it all upfront. But what's the difference between hire purchase, a loan or a lease – and how will you know what's the best option for you?

Personal loans are generally the most straightforward means of paying for your car on finance. It means that you borrow the amount you need for the car from places like high-street banks, online lenders or the Post Office, and pay them back on a regular basis. This way you never owe the car dealer any money and you can avoid putting down a hefty deposit.

There are two types of personal loan: secured or unsecured. Unsecured loans are generally more popular as they are mostly judged on your credit rating, whereas secured loans tend to require some form of collateral – usually your house. They also take longer to set up.

When taking out a personal loan, make sure you know what the Annual Percentage Rate (APR) is. This tells you the total amount the loan will cost you per year. The figure includes the interest rate and any other fees, to reflect how much you’ll be paying – the lower the percentage, the better.

Hire purchase, usually referred to as HP, is normally a quick and easy way to get credit for the car, as HP is usually arranged through the dealer when you buy the car. Beware that if you’re buying a used car, interest rates will be typically higher than if you’re buying new due to the fact that these deals aren’t usually backed by the manufacturer.

• Check out our top 10 cars for less than £150 per month

It's also quite a simple method of paying for your car, and it comes with less risk than personal loans as credit is only secured against the car. But because of this, HP means that you don’t actually own the car until the final payment is made.

You will normally have to pay a deposit with HP – usually around 10 per cent of the invoice price. That said, if you have a car to part-exchange, then its value will count towards this cost.

After the initial deposit, you will pay off the rest of the HP loan in fixed monthly repayments. You can agree on how long you take to pay back the loan, but the longer the agreement, the lower then monthly payments will be. However, in the long run you’ll end up paying more interest.

A Personal Contract Plan (PCP) is similar to an HP agreement in the fact you will have to put down a deposit and pay back the loan in monthly instalments – paying the rest in a final lump sum.

• Check out our top 10 cars for less than £300 per month

However, at the end of the agreement you don’t have to pay off the final lump sum if you don’t want to keep the car. You can hand the car back and pay nothing, or you can trade it in and start the cycle all over again.

A PCP is great if you want flexibility, as it's easy to adjust if you don’t want to keep the car. It also means that the monthly repayments are low, as they cover depreciation and interest, while the bulk of the cost itself is paid off at the end in a big lump sum.

However, beware that you will have to be truthful about your predicted mileage. If you go over the agreed amount then you will be liable to a fine at the end of the contract.

No one way to finance a car is considered better than the next, and different manufacturers will always promote different deals. But shop around and do your research, and you’ll be sure to guarantee yourself the best deal.