buying a car

What are your finance options when purchasing a car?

Buy a car and you won’t need to save a lot of money beforehand. This is because there are various finance options available if you don’t want to pay for a set of wheels outright, no matter if you want to purchase a brand-new vehicle or a used car — as Audi dealer Vindis outlines in the following guide…

What are my options when buying a new car?

1. Hire purchase (HP)

One of the simplest methods of finance available to you when purchasing a new car is hire purchase — or HP for short. Sixteen per cent of those involved in a WhatCar? survey admitted they favoured this type of car finance.

A deposit needs to be paid when taking out a HP agreement. This is often 10 per cent of the total value of the car at the time of the purchase. From there, you repay the remaining balance in monthly installments, plus interest, throughout the rest of the loan period.

Pay the loan in its entirely and the vehicle will become yours to own outright. Up until then, you won’t need to be concerned about any excess mileage charges and there’s no reconditioning costs to worry about either.

There’s a few consumer rights to note when it comes to HP agreements too. You may be able to return the vehicle once you’ve paid half the cost of the vehicle and not be required to make any more payments, for instance, while your lender will not be in a position to repossess your car without a court order after you’ve paid a third of the entire amount that you owe.

Be aware though that the car will not be in your ownership until the final payment of the loan has gone through. Miss a payment or a collection of them and you could well be at risk of losing the car. Likewise, you won’t have a legal right to sell the car until all payments have been made.

2. Personal Contract Purchase (PCP)

You may recognise there are a few similarities between personal contract agreements — otherwise referred to as PCP agreements — and HP agreements. Ranked as the second most popular finance option when buying a new car according to the aforementioned WhatCar? poll, with 25 per cent of those involved in the poll saying they favour this technique, you again pay a deposit, which is often ten per cent of the vehicle’s overall value too, before paying a series of monthly installments.

These monthly installments will be going towards the depreciation in the car’s value throughout the contract period this time, however, and not the whole value like with HP agreements. Once you reach the end of the contract term, you’ll be presented with three options with what you want to do next:

  1. Return the vehicle to its supplier — this won’t cost you anything unless you’ve exceeded your agreed mileage or fail to return the car in a good condition.
  2. Take full ownership of the vehicle — though for this option, you will be required to make a final ‘balloon’ payment. This amount will be the car’s guaranteed future value, or GFV for short.
  3. Trade the vehicle in and use any GFV equity as a deposit towards getting your hands on a new set of wheels.

With the GFV, you’re effectively repaying the difference between what the vehicle is worth at the moment you pick it up brand-new at a dealership and the amount that it’ll be worth at the end of a contract, in addition to the cost of interest. Take note too that the GFV will be agreed before a PCP contract begins, though so too will a mileage allowance — and any excess mileage charges will apply if you go over this limit.

There are a few more points to make a note of ahead of taking out a PCP too. You will be unable to sell the vehicle during the contract period of the PCP agreement, as you won’t own the car during this term, while some PCP contract providers will have a limit on the number of days that a vehicle can be out of the country — something that’s certainly worth thinking about if you drive abroad at least from time to time.

Hoping to settle at an earlier date? Then take note that the difference between the car’s current value and the payments which are outstanding must also be paid. Early settlement charges sometimes apply here too, so bear that additional cost in mind too when thinking about doing this.

3. Personal Contract Hire (PCH)

Often shortened to PCH, personal contract hire is the leasing option of the types of car finance available to you. This is because you will never own the car in question when taking out a PCH plan; it must be returned at the end of the contract term.

You will pay a dealer a fixed monthly sum so that you can use one of their vehicles. Fortunately, the costs of servicing and maintenance are both factored into this amount. Once a PCH agreement ends, you simply hand the car back to the dealer and needn’t worry about the vehicle depreciating in value.

Consider PCH plans if it’s your intent to frequently change your set of wheels. However, take note that you must ensure the vehicle remains in good condition during the entire time it’s in your possession and that you don’t exceed the annual mileage limit agreed at the start of the agreement — extra costs could come your way otherwise.

4. Personal loan

Personal loans are obtained from banks and building societies. Once granted, these enable you to spread the cost of purchasing a new car over a period of time that can last anywhere from one year to seven years. According to the earlier mentioned survey by WhatCar? a personal loan is the most popular way to finance a new vehicle, with a third of those who were involved in the motoring publication’s poll saying they favoured this finance option over all others.

If it’s your intent to borrow money over a long-term period, personal loans often make for the cheapest option for doing so. They also mean that you will own the car from the moment you take out the loan. Competitive fixed interest rates can be gained if you shop around for your personal loan too, while you often won’t even need to worry about paying a deposit to get the loan.

Using a personal loan to afford a brand-new vehicle has so many benefits. You won’t need to worry about any annual mileage restrictions, for instance, while you won’t need to hand the car back to the dealership once the loan is paid either — thus no need to be concerned about reconditioning costs either.

Just don’t fall behind with your payments. If you do, any of your assets can be seized — only your vehicle will be vulnerable to being reprocessed should the same thing happen with dealer finance. A clean credit rating will likely be required if you want to take out a personal loan too, while you’ll also beat the brunt of your car’s depreciation due to you owning the vehicle from the moment you take out the loan. Ensure the vehicle that you have your eyes on will be something that you can imagine driving for years to come, as the lender will still require you to repay the full loan even if you sell it or it gets written-off.

What are my options when buying a used car?

You can cover the price tag of a used car using either PCP finance or HP finance as well, with both using the same principles as we’ve covered earlier. Of course, you can also take out a personal loan when looking for a way to finance a used car.

However, leasing is a little bit more confusing to explain when it’s applied in the used car market. Some dealers will allow their second-hand vehicles to be leased, but not all of them. Many dealers will determine the amount that you have to pay on a monthly basis based on how much they expect the vehicle that’s being leased will depreciate over the finance term you have in mind. This may result in you witnessing more expensive leasing deals that you’d have expected though, as the residual values of used cars are usually more difficult to forecast and so dealers will be aiming to always cover the cost of any unexpectedly severe depreciation periods.