How to pay for a car

A car is a significant investment, so it’s important to work out your budget first.

Buying a car with savings

  • Saving up to buy the car you want can take time, but could have benefits:

    • As a cash buyer, you might be able to strike a better deal.
    • You won’t have monthly repayments and interest charges to think about.
    • You could sell the car in future and keep the money.

    But borrowing could be an option if you:

    • Can borrow at a low interest rate.
    • Need a car and don’t have time to save.
    • Want to keep savings to cover future expenses.
    • Would lose higher interest paid on savings, e.g. from ISAs.
    • Want extra protection on credit card purchases.

    You could use a mix of savings and credit, covering your car deposit and spreading the remaining costs, helping you to keep borrowing and costs to a minimum.

    More on savings accounts

  • If you’re aged 55 or over, and have been paying into a pension, you might be able to release a tax-free lump sum from your pension fund to buy a car. However, it’s important to consider the future impact of this, leaving you with less income when you are older.

    You should speak to a fully qualified pensions adviser, regulated by the Financial Conduct Authority, before deciding whether taking funds from your pension is the right thing to do.

    Find an advisor using unbiased.co.uk

If you plan to use credit

When you apply, lenders contact their preferred credit reference agencies to check your credit record. This may highlight any potential credit risks, and can impact the interest rates and any amount of credit you’re offered.

All lending is subject to an assessment of your circumstances.

With any form of borrowing, fees and interest might apply. To limit costs, you should only borrow what you can reasonably afford to repay, over the shortest possible term.

More on credit scores

Credit options when you’re buying a car

  • If you’re buying a car through a registered dealership, depending on your needs and how long you plan to keep your car, you might like to think about car finance.

    Hire Purchase (HP)

    Make fixed monthly payments over 1-5 years on a hire purchase plan. At the end of the agreement you’ll own the car, as long as you’ve made all of the necessary payments. Plus, there aren’t any mileage limits to think about.

    Personal Contract Purchase (PCP)

    PCP plans offer lower monthly payments over 1-4 years, with the option to return, exchange, or pay the outstanding balance at the end of the agreement to own the car outright.

    The value of the car could also be guaranteed, subject to return conditions and mileage limits.

    Dealers might offer finance options themselves, but shop around to find the best deals.

    Try our car finance calculator


    With car finance, the lender buys the car on your behalf and will own it for the duration of the finance agreement. If you miss any repayments, the car could be taken away.

    You may not be able to buy a classic or a very old vehicle using car finance, so other credit options may suit you better if that’s your situation.

    Do you have car finance elsewhere?

    You could transfer your existing car finance to spread the cost of a lump-sum payment at the end of your agreement, or to take advantage of lower monthly repayments. Just be aware that early settlement fees may apply.

    More on car refinance
  • A personal loan could give you the option to buy a car from either a dealership or private seller. If you’re approved, the money will be transferred to your current account, ready to use. You might even be able to borrow more than the cost of the car to pay for any extras.

    Once you’ve paid the dealer or seller, you’ll own the car, with no mileage limits to worry about.

    A personal loan could offer you a fixed borrowing amount, over a term to suit your budget – typically 1-7 years. At the end of that term, the loan will be repaid in full, just as long as you’ve made all of the required payments.

    If interest rates are fixed your monthly repayments will be too, making it easier to keep track and understand your borrowing costs.

    Other lenders might offer loans with variable interest rates. If you choose one of those, just know that your monthly payments could change over time.

    You might be able to make overpayments on some loans without facing early repayment charges, which could reduce the term and amount of interest you’ll pay overall.

    More on car loans

  • Depending on the amount of credit available to you, a credit card could be a flexible way to pay the deposit for a car, or to purchase a lower-value vehicle in full. Just be aware of the borrowing costs which might apply, including interest fees and other charges.

    Not all car dealerships will offer the option to pay by credit card, so it’s worth checking first.

    An introductory or promotional rate could offer low or even 0% interest on card purchases. If you won’t be able to repay your balance before any offers expire though, your standard interest rates will apply to your outstanding balance, which could significantly increase your borrowing costs. That could mean using a credit card is not the cheapest or best option for spreading the cost of a car, so make sure you plan ahead and do your sums.

    It’s worth knowing, if you miss a payment or go over your agreed credit limit, you could lose any promotional or introductory interest rates, so if you do use a credit card, manage it carefully.

    If you buy a car with a credit card, you’ll own it from the start, but as there’s less structure around your repayments, that could make it harder to budget, especially if you use your credit card to make further transactions.

    Unless a 0% interest rate applies to purchases, to avoid paying interest on purchases, you need to pay off your statement balance in full and on time every month.

    You can pay as much as you want when you’re able to, or as little as the minimum payment each month. Just be aware that if you only pay the minimum, it’ll take longer and cost more to pay off your balance.

    Where the total purchase price is over £100 and up to £30,000, credit card purchases will usually be covered by Section 75 of the Consumer Credit Act 1974.

    On some credit cards, you might be able to request a money transfer, moving funds from your credit card to your UK current account. That might be a helpful option if the dealer or private seller you’re buying from doesn’t accept credit cards – just make sure you’re buying from someone you can trust.

    Also, be aware that a transfer fee may apply, and purchases made using cash, debit card or bank transfer aren’t covered by Section 75.

    Before you make payments to anyone from your current account, it’s worth making sure the payment details are genuine. There’s a form of fraud, where emails including bank details are intercepted and changed by criminals, so you unconsciously send funds to the wrong account. This can be avoided by making a simple phone call, or requesting a printed invoice including the correct payment details.

    Refer to our fraud hub if you’d like more information about protecting yourself.

    More on credit cards

  • If you use an overdraft on your current account, you might be charged daily interest, with will be detailed in the terms and conditions of your account.

    Some banks and building societies will allow you to use an unarranged overdraft, but your credit score could be impacted if you do.

    Instead, you could apply for an arranged overdraft on your current account. You’ll only be charged daily interest as and when you use it.

    Just be aware, the amount you can borrow with an overdraft may be more limited than other types of credit and, if you use the full amount, you won’t have that safety-net to fall back on in the short-term.

    An overdraft might not be the most cost-effective way to manage long-term borrowing. Rather than the purchase price of a car, which might take considerably longer to repay, an overdraft could help you to cover short-term costs, such as unexpected car repairs.

    More on overdrafts

  • You might be able to borrow more against your current mortgage, or remortgage with a new lender to make a significant purchase, like a car.

    This could depend on:

    • Your age and whether you’d be extending your mortgage into retirement.
    • Whether your lender will let you add to your mortgage for this reason.
    • Your personal circumstances and the health of your credit record.
    • Whether you can afford additional repayments.
    • How close you are to paying off your mortgage.
    • The loan to value ratio for your property.

    While interest rates are low, you might consider borrowing more on your mortgage to pay for a car. But it’s really important to consider the impact of future changes in interest rates, and your financial circumstances.

    Because your mortgage is secured against your home, it could be repossessed if you don’t keep up with your repayments. That in itself might be a reason to choose an alternative borrowing option.

    As a general guide, you should try to limit any borrowing to the time you’ll own the car. That way, you’re less likely to be repaying debt on an asset you no longer have. This should also help if you need to borrow more in future, to cover another large expense.

    A typical mortgage term is 25 years but, in the UK, you might be able to get a mortgage for anything from 6 months to 40 years. Over a long period, your borrowing costs could really mount up, even at a low interest rate.

    To limit your costs, you should only borrow what you can reasonably afford to repay, over the shortest possible term. Another borrowing option could be cheaper over a shorter term, even if the interest rate is higher.

    You must seek support from a mortgage adviser before you apply to borrow more or change your mortgage in order to buy a car, especially as a car is likely to go down in value over time. You should explore all financing options to find the one which suits your individual circumstances.

    More on mortgages

  • Usually only available to homeowners aged 55 and over, you may be able to release tax-free cash to buy a car, whilst staying in your own home.

    This usually takes the form of a loan, secured against your property. You won’t have to pay anything until you pass away, or move out of your home into long-term care.

    To decide whether equity release is right for you, it’s worth speaking to a qualified adviser. They’ll be able to explain the details and help you to explore about other options. We can put you in touch with a Scottish Widows Later Life Lending Advisor, or you can find a qualified adviser through MoneyHelper and the Equity Release Council.

    More on equity release

What could it cost to run a car?

Whether you want to go electric, upgrade to something newer, or buy your first car, below are some of the costs you’ll need to think about, in addition to the purchase price of the car itself.

Fuel

Aside from the varying costs of fuel, some cars are also more efficient, depending on your driving style, the distances you cover and the engine size.

Tyres

Within four years a car can wear out a full set of tyres, so it’s worth including those in your long-term budget. Specialist, large and slim-profile tyres can cost more to replace, so make sure you do your homework before you buy.

MOT and servicing

A regular service can highlight issues before they evelop further, and will give you confidence that your car is safe to drive. Servicing might also be a condition of your warranty. Based on information published by The AA, an interim vehicle check could cost £75-£125, with a full-service costing £150+, excluding additional parts and labour. For cars over 3 years old, an MOT is a legal requirement. Your MOT could cost £30-£125, depending on the vehicle you’re having tested.

Parts and repairs

Some parts might need to be replaced as they wear, including bulbs and windscreen wiper blades, which are relatively inexpensive. If something bigger needs attention, parts and labour could be expensive. New and dealer approved used cars might be covered under warranty, giving you peace of mind for a period of time.

Vehicle tax

This can vary, depending on the amount of CO2 an engine produces and the purchase price of the car. The lowest car tax rates currently apply to electric vehicles.  

Insurance

You must be insured to protect yourself and other drivers. Options range from third party cover, to fully comprehensive. It’s worth shopping around each year to find the best offers.

Depreciation

Most vehicles lose value over time. You can limit depreciation by looking after your car well, maintaining a service record and keeping your mileage as low as possible.  

Breakdown cover

New cars might come with cover for a period of time. Otherwise, it’ll give you peace of mind to arrange roadside assistance, just in case.

Consider all of the costs involved with buying and running a car before you go ahead and buy. That way, you’re less likely to regret your decision later.

A summary on paying for a car

Whether you’re buying a new car, or a used vehicle, working out your budget is the first step:

  • Think about the ongoing costs of running a car, on top of the initial purchase price.
  • If you can buy a car with savings, you won’t pay interest and the car will be yours from the start.
  • If you need to borrow money to buy a car, options could include car finance, a personal loan, credit card, or even adding to your mortgage.
  • For the best chance of being accepted for credit, you need to have a good credit score, and enough spare income so you can afford your repayments comfortably.

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