Car loans and car financing. What is my best option?

Answer: Buying a car is one of the biggest financial commitments of your life, so finding the best way to pay for it is crucial. With such a large amount of money required a large personal loan can seem like the easiest option, but is it the best?

The first and easiest option is, of course, to pay by cash. Cash means no interest on your savings, but with rates hitting rock bottom the benefits of paying by cash easily outweigh the downsides as you'll miss out on being charged interest for a loan. However, assuming you don't have cash, what's the best option?

Dealer credit – Car finance

The most common alternative you'll be confronted with – indeed it's likely it will be pushed on you at some point in the sales process – is car financing. This allows you to pay back your car in instalments, and may also include a part-exchange for your old vehicle.

The problem with car finance is that each instalment has interest charged on it, although some dealers will push so-called '0%' options where no interest is charged for a given portion of time.

The key questions to ask are what the total cost will be over the lifetime of your loan assuming certain repayments – then compare this to a personal loan. You should also establish what the additional cost will be if you miss a payment.

Credit card

One of the great advantages of paying by credit card is the protection afforded by Section 75 of the Consumer Credit Act. Section 75 means your card company is equally liable for the goods purchased, so if your car breaks down or isn't satisfactory you can pursue the matter through your card provider.

The disadvantage of course is the interest rates, which may be substantial. The good thing about credit cards is that you can choose how you stagger your payments as long as you cover the minimum repayments, which make them particularly suitable to those with uneven income streams. However, many car dealers won't accept credit card as a method payment, so double check this.

Personal loan

A personal loan won't offer the coverage provided by paying by credit card, and it won't be as cheap over the initial period as dealer finance, but the overall cost of the loan may make it your best bet. If you are looking into personal finance make sure you get the cost of interest over the lifetime of the loan explained to you. Then you can use this to compare it to other forms of financing.

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