Buying a car: What are the options?

I remember the day I got my first car. It was a 13-year-old Vauxhall Corsa from the year 2000, and it was objectively rubbish. There was no power steering, it was a white-knuckle ride if you went over 30mph, and it only had a tape deck (which was a big deal to 17-year-old me) – but it was my car and I loved it.

After 5 years and 50,000 miles, I sold it, and bought a shiny Ford Fiesta off my mum. Another 50,000 miles and several mechanics bills later, and it’s almost ready to go to the big car park in the sky. However, the dealership of mum and dad has closed for business, and now I’ve been left to traverse the intense world of buying a vehicle from a dealership.

There’s so many options when it comes to buying a new car, but one could argue that there are too many, which could very easily lead to analysis paralysis. To help, I’ve pulled together a quick guide on the most common ways of buying a car, with all the jargon removed.

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Option 1: Cash buying

This option is the most “traditional” way of buying anything: Saving up the money, and paying for the vehicle in one lump sum. This is a great option for someone with upwards of £15,000 in their bank account (which is what most cars cost nowadays, even second hand).

Pros: No long-term financial commitments, no interest, you can sell the car whenever you want

Cons: Quickly depletes savings, vehicle depreciation.

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Option 2: Personal Contract Purchase (PCP)

This is one of the most common ways of purchasing a car. In short, you pay a deposit for the vehicle, and agree a term of how many months you’ll be repaying. At the end of your term, you’ll have the option to pay the final amount for the car, or part-exchange it for a new vehicle.

Pros: Lowers the upfront cost, monthly payments can be agreed at a price that suits you

Cons: Long-term financial commitment, interest rates can be high and leave you paying a much larger sum over the course of the contract

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Option 3: Hire Purchase

This is very similar to a PCP agreement, but with one key difference: at the end of the term, you will own the car. This is an advantage over PCP, however it could mean that your monthly payments are higher than if you were to go down the PCP route.

This could be likened to taking a bank loan, and paying it back over a monthly fee.

Pros: Lowers the upfront cost, monthly payments can be agreed at a price that suits you

Cons: Higher monthly payments versus PCP

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Option 4: Leasing

Leasing a vehicle is much like leasing a property. You’ll pay a deposit, and then pay a monthly fee for the duration of your agreement. When the agreement ends, you hand the car back. Some leasing agreements even cover your tax, insurance, MOT, and other maintenance – which will level your monthly costs out.

Sounds perfect, what are the cons? Well, the big one is that you never actually own the car. You may also have certain rules in your agreement, such as only being able to drive a certain number of miles, which could leave you with additional charges at the end of your agreement.

Pros: No sudden costs or charges, having a new vehicle at a lower cost

Cons: You never own the car, there may be restrictions on how much you can drive

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Option 5: Salary Sacrifice

Salary Sacrifice has ballooned in popularity over recent years, and is looking even more enticing with the announcement of the government’s plans to increase employer’s national insurance contributions. But what is it?

To use the official definition, it is sacrificing part of your annual salary for a non-cash benefit. In the context of a car, it is agreeing that your employer can keep an amount of your salary, in exchange for a vehicle. In turn, this will lower your income tax and national insurance bills, as well as your employers contributions. For example, if you earn £25,000 per year, and you agree to pay £250 per month, you and your employer will pay tax and national insurance as if you are earning £22,000 per year – which can save you and your employer plenty of money over the agreement!

But with all good deals, there’s a catch – as your employer effectively buys your car for you and bills you back, understandably not all employers are willing to be part of the scheme.

Pros: Spreads the cost out of buying a new car, tax and national insurance savings

Cons: Not all employers participate in a scheme