Buying a new car? The finance options explained
March and September are two of the biggest months for new car purchases because of the new registration plates.
But with the average price of a new car in 2016 standing at £24,350, according to car comparison and data site JATO Dynamics, it’s a small fortune to pay for four-wheel travel.
For motorists thinking about buying a new car, here are the different finance options available:
Depending on your financial situation and the car you want to buy, paying cash can be the cheapest way to buy a new car, according to GoCompare Money.
“Some dealers offer cash discounts, and owning the car outright means you don’t have to worry about meeting monthly repayments or incurring interest”, said Matt Sanders of the comparison site.
However, one of the downsides is that you’re investing in a depreciating asset.
“Depending on the price, running costs and quality, new cars typically lose between 50% and 60% of their value over the first three years”, Sanders cautions.
A personal loan allows you to spread the cost of a new car and allows you to negotiate with the dealer on price. You also have the flexibility to choose the loan period but the longer the term of the loan, the more interest owed.
Buying a car with a personal loan enables you to own it outright (the car isn’t secured against you defaulting on the loan), so if needed, you could sell the car before the end of the loan period.
However, the interest rate you will be offered will depend on your credit history. People with a poor credit rating will be charged a higher rate of interest or may find it hard to get a loan.
If you do have a good credit rating, based on a £25,000 personal loan repayable over five years (60 months), Andrew Hagger of finance research site MoneyComms, lists these as the current best buys:
- Clydesdale Bank/Yorkshire Bank: 3.0% APR, £448.77 per month, total payable £26,926.20
- RateSetter: 3.1% APR, £449.84 per month, total payable £26,990.40
- Hitachi Personal Finance: 3.2% APR, £450.93 per month, total £27,055.80
- The AA: 3.3% APR, £452.01 per month, total payable £27,120.60.
Hagger said it’s always worth shopping around for your car finance. “Don’t assume your bank where you hold your current account will give you the best loan deal as that’s not always the case.”
Paying by credit card can be a cost-effective way of buying a new car though it’s unlikely many people would have a credit limit of £25,000.
A 0% purchase credit card allows you to spread the cost of the car and if you repay the balance within the interest-free period, you’re effectively benefiting from a 0% loan.
Sanders warns that once the 0% period expires you’ll be expected to pay back the balance with interest so make sure you consider this before paying by credit card.
Another bonus in paying on credit card is that purchases are covered by ‘Section 75’ of the Consumer Credit Act, which means the card company has equal responsibility (or ‘liability’) with the seller if there’s a breach of contract or misrepresentation when buying goods such as a car. ‘Section 75’ gives credit card users extra protection when something goes wrong but it comes with exceptions, such as marketplace sites.
However, an important point to note is that not all dealers accept credit cards and others may charge a credit card handling fee which will increase the cost of the car.
Again, Sanders says you will need a good credit rating to get the best interest rates and sufficient credit limit.
Hire purchase deals
After paying a deposit – typically around 10% – you pay monthly instalments, which cover the cost of the car plus interest, for the duration of the agreement.
A hire purchase deal, subject to you meeting the lender’s criteria, can enable you to borrow a larger sum of money than is available under a personal loan. The finance company ‘buys’ the car and ‘takes it’ as security meaning that you do not own the car until the loan has been repaid.
If you default on the payments the lender can repossess the car. You are unable to sell the car until the loan has been repaid.
Personal Contract Purchase (PCP)
This is where a finance company buys the car and you pay a deposit and monthly instalments to use it until the contract expires. At the start of the contract, the finance company gives the car a Guaranteed Final Value (GFV). The GFV will depend on the deposit paid, your monthly instalments and annual mileage.
At the end of the contract, you have the option to make a payment equalling the GFV and take full ownership of the car, hand the car back to settle the remaining finance or if the car is worth more than the GFV – use the difference in value as a deposit towards another car. Payments under a PCP can be lower than for other types of car finance. A PCP allows you to drive a new car every few years without owning it (if you don’t want to).
PCP contracts impose a mileage limit and penalties apply if you exceed it. Over the term of the PCP you may have only paid off the car’s depreciation so at the end of the contract you will not have any equity in the car.
Sanders says PCP can work out as an expensive route to car ownership, so it’s important to calculate the total cost of the deposit, GFV and monthly payments.
A personal leasing arrangement allows you to drive a new car for an agreed period and number of miles – without owning it. Leasing arrangements may include other costs such as servicing, tax and insurance. Without the need to buy or sell a car, changing vehicles is easier under a personal leasing arrangement and monthly payments tend to be lower.
The leasing company bears the cost of the car’s depreciation but no matter how long you lease the car for, you won’t own it. A mileage limit usually applies, with penalties for exceeding it, and you may face extra fees for any damage or wear and tear to the car.