Car Purchase - Ways of Paying

Car purchase. When you buy a car, you can pay for it in one of several ways:

Pay cash - the best and 'cleanest' option. Not only will you be avoiding added debt, you'll be in the best position to negotiate a discount.

Hire Purchase (HP) - you pay a deposit, perhaps between 10% and 40% and then pay off the debt plus interest in (usually monthly or quarterly) instalments. The asset (car) is not legally yours until the last payment is made. HP is sometimes called 'conditional sale'.

Bank loan - you arrange a personal loan from a bank/ building society or other lender and use it to pay for the purchase. Unlike HP, from 'day one' the asset is yours. From then on, you just need to clear the loan making repayments and interest regularly (usually monthly or quarterly). Unlike HP, you don't need a deposit.

Personal Leasing - Here you don't buy the car but you rent it. The cost usually includes servicing and breakdown insurance and can make sense if you're the sort of person who likes to change vehicle frequently.

Personal Contract Purchase - This is a sort of compromise between HP and leasing. When the vehicle is bought, the dealer promises to buy it back after set number of years at a pre-agreed price. Alternatively, the dealer tells you the price at which you can buy the car outright at the end of a set period of payments. So as you weigh up the deal, the "Minimum Guaranteed Future Value (MGFV)" will be an important consideration.

The MGFV is subtracted from the initial purchase price and the remainder is borrowed. Quite often, people will use the MGFV as a deposit on the purchase of another vehicle later.

Always ask the Annual Percentage Rate (APR) when you're borrowing money, see our guide to personal loans and if you're looking to use the vehicle for business talk to your accountant/tax adviser about the tax consequences of the different courses of action.

See Also: Moneyextra Insurance Service motor insurance making motor insurance work better Rates & Performance section

Last Updated: May 2007 © Moneyextra.com

Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.