How to finance a car - the cheaper way!

Cheapest way to finance a car

The following article argues the case for why you should never buy a car using a finance lease as there is a more cost effective alternative:

In our consumer debt led society it appears to be quite normal for cars to be leased as brand new cars or else financed such that at the end of a set period - say 5 years the new car is eventually fully owned by the lessee.

It strikes me that the common method of financing chosen is the one provided by the dealership. However, is this the cheapest?

Credit score matters

Depending on your credit score, the amount of deposit you put down, whether you have an other assets for collateral you could be paying interest at anywhere between 5% - 12% APR.

So what does your average consumer do? Well they consider that they need a car/ need to replace their old car. They consider that they have two options: either buy a used car for the full amount/ part exchange or buy a new car on finance lease as that will require a smaller outlay in the short term (although a much bigger one in the long term due to new cars being more expensive than used and the interest charged on top).

An alternative to a car finance

I'm going to suggest that a lot of money could be saved here if you are willing to accept that you don't need a brand new car. Used cars nowadays that are less than 3 years old and have done less than 30,000 miles on the clock are generally going to be good cars. Cars are built to last much longer nowadays assuming it's been regularly serviced.

You may be thinking that you don't want a used car as it would mean having to cough up a large amount of cash upfront. I'd like to suggest an alternative - personal loan.

Instead of taking out a finance lease on a new car have you considered trying to find a cheap personal loan. I did a quick search online and found that I could borrow up to £7,500 at 3.4% over a five year term from a well known high street bank. So you find the used car that you want to buy and take out a personal loan. Then you go out to a used car dealer/ private seller and pay them in full. Your monthly repayments will be cheaper than had you bought the new car on a finance lease for two reasons:

1) 3.4% is likely to beat all finance lease interest rates (APR), meaning that the interest payments will be lower
2) a used car will be cheaper than a brand new car so you end up borrowing less

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