You’ve seen the car you want at a price within your range, so now you’ve got to decide how you are going to pay for it. And that will depend to a large degree on if you plan to buy new or second hand.

If you plan on buying a new or second hand car and keeping it for at least four years, a straight loan or hire-purchase agreement will cost less in the long run.

But if you’re buying new and plan to keep the car for no more than three years before swapping it for another new car, you should consider a personal contract purchase plan.

Straight loan
In this case you take out a loan in advance to buy the car outright, then repay the debt in agreed monthly instalments. There are two types of loads, secured and unsecured. Secured is cheaper, but if you fail to pay on time the lender can confiscate whatever you offer as security, which might be your house.

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Hire purchase
You pay a deposit followed by a fixed amount for an agreed number of months and then you own the vehicle. This is generally only available for new and nearly new cars. You must be aware that until you have made the final payment, the bank, car dealer or loan company still owns the car. Until then, you cannot sell the car without obtaining permission. If you fall behind by as little as two repayments, the finance company can repossess the car.

Personal contract purchase
This is available for new and nearly new cars only. You pay a deposit (up to 20% of the total price), followed by agreed number of low monthly repayments for up to three years, at which time a final payment must be made. This figure is agreed at the start and is known as the Guaranteed Minimum Future Value (GMFV). At the end of the agreement you can keep the car, hand it back, or part-exchange it for another new car.

If you want to keep the car you must pay the GMFV. If you hand it back, you owe nothing more but you won’t have a penny of your deposit or payments refunded.

In effect this is a lease agreement. The car belongs to the finance company until the contract ends. If you end the agreement early, you may have to pay a penalty. Usually the car is subject to agreed annual mileage limits with a penalty if you exceed them, must be properly serviced and kept in good condition

Look into all the car financing options available before you look for cars to see how far your budget will stretch. It pays to shop around and be aware of any potential pitfalls as you are likely to be parting with a large sum of money.

Always read the terms and conditions to make sure you understand how much your loan will cost in total. Under the new Financial Services Authority regulations these must be clearly visible and explained in plain English.

Beware of lenders quoting you the flat rate instead of the APR as it is lower, so sounds a better deal. Also be cautious of car manufacturers offering finance deals with zero or low interest rates. It may mean you may lose out on discounts and extras that someone with another type of loan will get. Also the amount of deposit required for such deals can be high.

Remember that low monthly payments over a long period can be tempting, but you could end up paying much more for the loan than your car is actually worth. Work out how much you will end up paying overall for your car loan.

Some lenders may ask you to take out Payment Protection Insurance, which can add a bit more to your monthly loan payments. Check if this is necessary and how much it costs.

Never accept the first finance deal offered by a car dealer as this will try the most expensive option, the one they will get the best commission on. Always negotiate for a better deal.

If they offer you finance, check it out against other loans before you accept any finance agreement.

Don’t let the dealer rush you into a finance deal. They must, by law, give you a full written quotation which you can take away and consider. If they offer you a ‘deal for today only’, don’t let this fool you into signing a finance agreement.

Paying By Credit Card
If you buy anything with a credit card then you enjoy an extra level of protection if anything goes wrong.

If the goods cost more than £100 and less than £30,000 and you paid part or all of the purchase price using your credit card, then you will have additional rights against the credit card company under section 75 of the Consumer Credit Act 1974.

This states that the credit card company will have equal liability with the trader for any breach of contract. So if there is a dispute with a trader you should contact the credit card company as well.

But if considering using a credit card for a large purchase make sure you are fully aware of the effect interest payments will have on the final size of the purchase.