What's the best way to finance a car?

Generally, a loan from a bank or automobile dealer is the best way to finance a car purchase. However, paying in cash may be the better option.

This is a fancy way to say paying in cash. As of August 2016, interest rates are low, so money sitting in the bank is not likely earning anything substantial. If the opportunity cost of that money is low and you plan on buying a new car, it might be wise to pay in cash. The most important thing to consider before doing this is to ensure you have enough of an emergency fund left over to cover unforeseen expenses. The major pro of self-financing is you do not have any extra costs associated with a loan, you do not pay any interest, and your monthly cash flow in the future is better. The con is this capital may be used more wisely in a different area.

If your credit rating is good enough, you can easily get an auto loan for a car. However, do not use anything as collateral for the loan besides the car itself so none of your other assets are at risk in the event of default. The pros are these loans can be arranged over the phone or on the internet, they generally have very favorable repayment terms and are inexpensive. A con is extra fees may be tacked on, and there is a time lag before you get the money. Also, you will not own the car until the final loan payment is made.

A hire purchase is another way to purchase a car. These loans are arranged by the car dealer. Unlike a loan from a bank, with a hire purchase, you are required to put 10% of the cost down as a deposit, and the remaining balance plus interest is repaid over a 12- to 60-month timeframe. These programs offer very competitive rates and are fast and easy to arrange. However, two major cons exist. First, shorter-term agreements tend to be more expensive. Second, like with auto loans, you will not own the car until the final payment is made.