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How Should You Finance A New Car?

A new car can be an expensive purchase, especially if you are going for a brand new model. Many people warn of the depreciation issue when purchasing a new car, however, if you aren’t planning on trading it anytime soon, then this isn’t as much of an issue as people will have you believe.

But purchasing a new car can present the pressing issue of finances and how exactly you will fund your new purchase.

Car Loans

Many people choose to take out a car loan when purchasing a new car. But making sure you know exactly how much you will be paying back is vital, especially if your credit is less than stellar. Understanding the finance available to you when you have bad credit can help you avoid the common pitfalls of bad credit car finance, such as paying over the odds for interest, which not only leave you in negative equity but can become unmanageable over time.

Many car loans can be secured against the car, meaning if you default, unlike with a traditional bank loan, your car can be repossessed. Another alternative is to get a loan via a non-car dealership lender, meaning you are fully responsible for the payments, and your car isn’t at risk.

Hire Purchase

This is a great option for those who plan on changing their cars every few years. With a hire purchase agreement, you are essentially leasing the car, and any payments you make go towards the hire payments over the agreed term. Once your hire agreement is over, you then have the option to buy the car. You never fully own the car, and you can also be limited to set mileage and other conditions upon returning the car. In reality, it is much like renting your home. You can make it your own while you have it, but you will have to give it back or buy it outright once your lease is up.

The amount you’ll have to borrow is determined by the financing company’s estimate of how much the automobile will depreciate during the period of the loan (typically 24 or 36 months) minus the deposit you’ve made. This amount, plus interest, will be paid off during the deal. So you’re not covering the entire cost of the vehicle. The average annual percentage rate (APR) starts at roughly 4%.


Your other alternative is to fund the car outright using savings. It is also a guaranteed way to ensure there are no restrictions or terms associated with your sale. However, not everyone is in a financial position to buy new cars or even nearly new cars for cash, and as such, people making cash sales for cars will tend to opt for older models. The downside of this is that older models can cost more to maintain over the time you own the car due to wear and tear, general faults and damage due to not being properly maintained.

Choose your route carefully when it comes ot making the best choice to finance your new car purchase to avoid overextending your finances or making bad decisions due to limited fund.