Save thousands on your next car!

Here's a guide to getting more car for less cash.

Although I've never owned a car in my life (and haven't driven one for many years), I think of myself as something of an authority when it comes to buying cars.

My alleged expertise came from working with several of the UK's leading motor-finance houses over a ten-year period. During this time, I helped dealer groups to sell finance and insurance, including spells when I taught individual salespeople to flog what we in the trade call "F&I".

Hence, although I don't know one end of a crankshaft from the other, I do know how much extra profit dealers make from selling financial products alongside vehicles. Indeed, it's common for dealers to make more money from selling finance and insurance than they do from selling cars.

To help you to get the best possible deal when buying a car, particularly a new car, I devised the following acronym: CLIO, which stands for Car, Loan, Insurance and Other costs. I don't wish to reinvent the wheel (boom, boom!), so I'm going to discuss only the second of these subjects in this article. Therefore, today's topic is borrowing money to purchase a vehicle -- here are four ways to cough up for the car of your dreams:

1. Can you pay cash?

The first point I'd like to make is that it's almost always cheaper to use existing savings to buy a car. That's because you can expect to pay interest of somewhere between, say, 6% and 26% a year when borrowing money, depending on your credit rating.

On the other hand, you're sure to be earning less than 6% a year on your savings -- and that's before taking tax into account. What's more, being a cash buyer makes it easier to shop around and drive a hard bargain (sorry!).

2. Can your house pay for your car?

If you have a flexible, offset or current account mortgage, you can raise funds cheaply by increasing your mortgage or reducing the savings held in any offset account. However, always bear in mind that borrowing against your home puts the roof over your head at risk, so tread carefully. Frankly, I wouldn't recommend remortgaging or increasing your home loan to anyone who has a standard (inflexible) mortgage, because the costs and risks involved appear to me to be just too great.

3. Does dealer finance sound attractive?

As I mentioned above, dealers put a lot of effort into persuading you to buy finance and insurance, as well as a vehicle. However, always remember that salespeople are there to sell, so what's on offer may not be to your best advantage.

To tell the truth, I've always felt that dealer finance packages can be divided into two types: those that are too expensive, and those that are too complicated for most people to understand. Dealer-finance packages may well be convenient and attractively advertised, but these benefits come at a price. Here are some of the pros and cons of different payment methods:

Financing a car
*Type of finance*	*Pros*	*Cons*
Cash	Can negotiate substantial discount from list price. Don't pay any interest.	Can take a long time to save up. Lose savings interest.
Personal loan	Own the car from day one. Usually the lowest interest bill - and can haggle.	Watch out for expensive payment protection insurance.
Increase mortgage	Cheap way to raise funds. Easy with flexible or current account mortgages.	Not an option that we'd recommend, because you put your house on the line!
Dealer finance, 0% deals and manufacturer special offers	Convenient (but convenience always costs).	Taking 0% or low-cost finance makes haggling on price difficult.
Hire-purchase	Can return the car after paying up to half of the cost. Can pursue the finance company if car is faulty.	Don't own the car until all payments have been made. Interest rates and fees are often steep.
Personal leasing or personal contract hire	A two- to four-year hiring agreement with mileage limit. Small deposit, plus low monthly rentals that include servicing costs and road tax.	You never own the car. Exceeding the agreed mileage is pricey.
Personal contract purchase (PCP)	Good for people who change their car often. Lower monthly repayments than HP or personal loan. Don't have to buy the car at the end of the deal.	APRs appear low, but interest bills are higher than HP or personal loan. Need to stump up a big final payment to own the car.

4. Why not pick a personal loan?

Although I bought my wife's last car for cash (and plan to do so in future), if I was forced to borrow money to buy a car, then I'd do so by arranging a Best Buy personal loan. One major advantage of paying with a personal loan is that you own the vehicle from day one, so no one will take it away from you if you can't keep up the monthly repayments.

Another benefit of a loan is that normally you pay less interest. Indeed, one survey by The AA found that finding a bargain personal loan could be £2,000 cheaper than signing up to dealer finance. Of course, by paying a lower amount, you can reduce your debt burden, or use this saving to improve the specification of your car, upgrade to a better model, etc. You can compare best buy loans right here on lovemoney.com.

Here's wishing you many happy years of worry-free motoring!

More: Cut your petrol costs by a third | Drive a brand new car for less
Compare loans at lovemoney.com

This article was updated in May 2010.