Buying a new motor – whether it is new or used – is exciting. However, sorting out the finance deal you need to cover the cost, is not, it’s just not. I will try and give you an insight in the how to get the best car finance deals.
While most people spend hours on their research when it comes to a getting a new car on the road- comparing and contrasting various makes and models, negotiating hard to get the price down, and yet when it comes to the finance deal the number of people that do their due diligence is significantly less.
However, by spending over the odds on the borrowing you can easily wipe out any discount you managed to get on the vehicle price and make the overall cost significantly higher. In fact, you could save yourselves thousands by understanding the number of finance options available to you and the associated charges and interest rates. Ensuring you have the best finance deal is ultimately the most important part to ensure you keep costs down when getting a new car.
The different types of car finance
Hire Purchase plans (HP)
Hire purchase (HP) plans usually require a part exchange (i.e. your existing car) or a lump sum as an initial installment and commit to a number of set monthly sums. You can then drive the car away the same day and once all the monthly payments are complete, the car is yours.
Until that last installment is paid, however, the HP provider has the authority to repossess your car if you fall behind on your payments. Although, repossession is a very detailed and difficult process to achieve, not to mention a last resort.
Initially you will first be sent written notice to allow you the opportunity to clear your arrears. And if you can’t make this payment a specific court order would have to be put in place before your car can be taken back.
However, during this time that you will not be able to sell the car until you have paid the final instalment (which may be higher than the previous months) and, while there is the option to look into Voluntary Termination rights, ending the agreement early is likely to result in a penalty. Another option you could review is to part-exchange your vehicle and refinance the existing loan, though this is likely to incur higher interest rates and mean you are tied in much longer.
Nine times out of ten low rate personal loans are a much better way of paying for a car than the previously discussed hire purchase agreement. Furthermore, if you come into financial difficulty you can always sell the car to pay off the loan. The best rates are given on loans at a value of between £7,500 and £15,000. Therefore, if you were looking to borrow in the region of £6,000, I would suggest increasing the value of the loan to £7,500 in order to capitalize on the cheapest interest rates.
However on a larger borrowing amount, the best way to ensure a low interest rate is to consider the option of securing the loan against your home. Very important to take into account that if you default on the repayments your property can be repossessed.
0% credit cards
A 0% credit card could be the best option for you if the cars you are looking at are second hand at a cheaper price point. 0% is generally only available to people with good credit scores so might be worth looking into this initially.
For this option though, you will need to have enough discipline to prevent incurring high interest rates when the 0% period ends.
Leasing agreements is essentially the long term loan of car in exchange for a monthly rental over an agreed period and set number of miles. The major advantage is getting a brand new car every every few years with little to no upfront fee. The two major kinds of leasing agreements are personal contract hire (PCP) and Personal Contract Hire (PCH).
Personal contract Hire (PCP)
A PCP deal is essentially a loan to assist with buying a car. But unlike a normal personal loan, you don’t have to pay off the full value of the car and it wont be yours at the end the end of the deal (unless you choose it to be).
It’s one of the more complex financial products available when buying a car, but it can be broken down into three main parts:
The deposit (usually around 10% of the price of the car). Some car manufacturers’ offer really healthy deposit contributions’ of £500-£2,000 or more if you’re buying a new car but it tends to be only if you take their finance – for example, VW Finance offers £1,000. Obviously you will have to borrow less the more the deposit you can get.
- The amount you borrow. This will ultimately depend on how much the finance company calculates the car will depreciate (or lose in value) over the contract period (usually 24 or 36 months) minus the deposit you’ve put down. This is the total you will pay, plus interest, meaning you wont have to pay the full value of the car off. Typical APRs are 4%-7%.
- The balloon payment (only required IF you want to own the car). The balloon payment is also sometimes referred to as the Guaranteed Minimum Future Value (GMFV). This equates to how much the dealer expects your vehicle to be worth after your finance agreement comes to an end. The amount is agreed at the start of your deal. Key thing to note here is that this payment is optional and only necessary if you want to buy the car outright. You will get a choice of what to do at the end of the deal such as renew the deal on another car.
Personal Contract Hire (PCH)
Personal contract hire is fundamentally the same as regular contract hire, but it applies only to private individuals. When you hear people refer to the term ‘car leasing’ they are usually talking about personal contract hire.
With a personal contract hire agreement you effectively ‘look after’ the car for an agreed amount of time, usually called the ‘lease period’. However, though the car is in your possession, it is not actually your property. In exchange, you make fixed monthly payments to the dealership for the duration of the contract. When the contract is up you just take the car back to the leasing company or take out a new lease. With PCH one thing you don’t have to worry about is the resale value of the car. You never own it, so you can simply return it and walk away.
With PCH, you can have a new car every few years without having to buy it at the end of the arrangement, while with PCP you have the option to buy the car at the end, or upgrade to a new one and enter into a new agreement. Either way, remember to check the terms and conditions carefully for penalties and extra charges.