How best to finance your new car

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How best to finance your new car

25th January 2014

Buying a car is, after a home, probably one of the single most expensive items any of us will purchase. Indeed, some luxury cars can cost more than the value of property in some parts of the country!

The cost involved means exploring all the various options to finance your purchase, to find the one most suitable for your budget and circumstances.

The basic choice is between cash and credit, and there are a variety of ways to borrow money to buy a car if you decide to choose that route.

Is cash king?

Firstly, if you go with cash the main problem is that most of us simply don't have the amount of money required to buy a vehicle outright. Even if we do, many people will still prefer to spread the cost over a number of years rather than pay out a large sum in one go.

The main advantage of cash is that there will be no interest to pay on the sum borrowed. You hand over the total amount due and the car becomes yours straightaway. With rates still very low on savings accounts, if you do have the money in the bank, you may see no advantage to it sitting there gaining little in the way of interest.

Credit options for your vehicle

There are a variety of ways to borrow the money required to finance your new car. Using a credit card is another way of paying. With many cards offering 0% rates on purchases for an introductory period, you can effectively borrow the money for nothing as long as you pay it off in full within the timescale. Depending on the offers available at the time, this could be up to 18 months.

If you have already bought your car on a credit card and have money left to pay off, you might want to shift the balance to a card with a better rate. Remember that most cards apply a balance transfer fee if you move the outstanding amount to a new card. This, however, will be far less than sticking with your original card and being charged the standard APR.

Many credit cards also offer rewards such as supermarket points, cash back or air miles, so you also have the potential to rack up some serious extra benefits at the same time.

In addition, if you are spending between £100 and £30,000 on your vehicle, card purchases are protected under the Consumer Credit Act 1974. If, for example, the dealer went out of business before delivering your car, you would be covered.

The main stumbling block with credit cards is that many dealers don't accept them and certainly not for the total amount. Most likely they will have a limit of £2,000 or £3,000 with the remainder coming from cash, cheque or balance transfer.

Some dealers may allow you to pay up to their maximum with two different cards. Depending on the cost of the vehicle, this may or may not go a substantial way to covering the total cost.

A PCP, also known as a personal contract purchase or personal contract plan, is another finance option. This works by allowing you to only pay off the depreciation of the value of the car, using monthly instalments, unlike hire purchase, or HP, under which you pay off the total value of the car.

The main advantage is that the monthly payments are lower, and/or the deposit is smaller and/or the repayment term can be shorter with a PCP. Most PCPs are between 18 and 48 months long, with the most common being 36 months.

At the end of the term there will be an outstanding balance to deal with and a variety of ways to tackle it. You can return the car to the dealer and simply walk away, normally subject to a few conditions such as not exceeding an agreed mileage, and sticking to the service plan. You might decide to pay off the outstanding balance, in which case you will own the car outright, or re-finance to pay off the balance.

Another option is to part exchange your vehicle for another one or, if your finance company agrees, you can sell your car privately and keep any cash over and above the Guaranteed Minimum Future Value, or GMFV. Research all these options in full before deciding what to do.

As for hire purchase, with this method you will pay a deposit followed by fixed monthly amounts over an agreed period. You will own the car once the final payment has been made, and any finance agreement has to be settled before the car is sold.

An advantage is that most customers will be able to get HP, even if they have a low credit rating, because the vehicle can be used as collateral in the event of non-payment. Monthly payments are also likely to be less than if you took out a personal loan.

The disadvantages are that you may have to stump up a sizeable deposit and that the vehicle will continue to be owned by the finance company right until the last payment is made. Any failures in making a payment could lead to the car being repossessed.

Leasing a car is a popular choice. It's thought that more than 20% of all vehicles are leased, with 50% of cars in the luxury market leased. The main benefits are that you are able to get behind the wheel of a newer car which is always covered by a warranty, and you can afford a larger and more luxurious model than you might otherwise be able to drive.

With car leasing you are basically paying to use the car for a specific period of time, a bit like renting. There will be a down payment and monthly instalments. The better your credit score, the better the lease deals available.

When the lease period comes to an end, you return the car to the dealer, and assuming it is in good condition, there will be nothing more to pay. Most lease agreements will give you the choice of buying the car when the contract ends.

Thank you to Louis Rix, Director at for writing this guide. Louis has over 12 years automotive finance experience and regularly contributes to well know publishers in the UK.

Posted in Car finance

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