Loan Or Car Purchase Plan?

By Simon Duffy

I'm thinking of buying a car soon, not a brand new car but one that's maybe a few years old. So, given the current financial climate should I get a personal loan to fund the car or should I go for a newer car and a car purchase plan, or should I be sensible and save up for my new car!?

Let's look at the difference in these 3 options and what each route means for me. Firstly a personal loan or unsecured loan. I don't want a secured loan because it would be secured against the equity in my home and with 2 children to look after I think my house is more important than a nice new car! Say I'm looking for £10,000 over 4 years, that's around £310 per month and over 3 years it would be about £240 per month. All in all not too bad but still a fairly hefty amount to find every month. At least I know the car is mine and I can trade it in and use it as a deposit for another vehicle if I choose to.

My second option would be a car purchase plan, and these are usually only available on brand new cars. You pay an initial amount which is deducted from the total price of the car. The amount that's left is divided by the term that you choose to run your contract over and there is usually 8 to 10 per cent APR, Typical added to this. Then at the end of the contract term there is an optional final payment to be made. You can choose not to make this payment but you must return the car, then I'd be back to where I started, i.e. no car! The other option is to make the final payment and then I can keep the car. Or I could get another brand new car, once I've settled the current contract. My problem with these schemes is that the car prices are fairly steep. For example, one car I've been looking at is £21,000 list price but you could buy the same car second hand, privately with 8,000 to 12,000 mileage for around £17,000 to £18,000. So £4,000 depreciation over the first few thousand miles. That's why I can't bring myself to buy a new car.

My other option, of course, is to go the old fashioned route and save up the money. I was thinking that saving 50 per cent of the cost would be a good idea, then I could try and get an unsecured loan for the other 50 per cent. This way if for any reason I cannot make the repayments I could choose to sell the car and then pay off any amount left on the loan. Then any amount I have left over I could use to buy another car, either a cheap second hand car outright or use the money as a deposit on another car that costs less.

This is all based on what I'm comfortable with repaying every month both in terms of what I can afford and also what I think is reasonable to pay for a car every month. After all a car is a car, I use it to get to work, to go shopping and so on. Do I really need to spend more money on a car when fuel prices are rising and motorists are getting taxed more heavily every year...

Simon Duffy writes for the Financial Blog a UK Finance Blog talking about all aspects of personal finance