What’s available so you can afford your next car?

Thursday, September 13, 2018

What’s available so you can afford your next car?

Unless you’re looking to buy your next car outright, you won’t be required to save a lot of money before you can make the investment. As Audi dealer Vindis details in the following guide, you have the choice of a few different finance options whether you’re planning to purchase a brand-new or second-hand vehicle…

What are my options when purchasing a new car?

1.      Personal loan

A visit to a bank or building society will be required to take out a personal loan. 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.

Personal loans could be ideal for you if you want to borrow over an extended length of time. This is because they usually make for the cheapest finance option to do 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 buy a new car has an abundance of 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.

However, do not fall behind on 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.

2.      Hire purchase (HP)

It’s isn’t difficult to understand what is meant by 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 will be initially required 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. 

The vehicle’s outright owner will become yourself as soon as you’ve paid the entire loan. 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.

HP agreements come with a set of consumer rights 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. 

Just keep in mind that you’re not the owner of the car until the entire HP agreement has been paid. Therefore, 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.

3.      Personal Contract Purchase (PCP)

The aforementioned HP agreements and personal contract purchase agreements — often referred to simply as PCP agreements — share a few similarities. 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.

During a contract period though, a PCP agreement’s monthly installments will be being paid towards the depreciation that is being recorded in the value of the vehicle. This is different to 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.

Think of GFV then as effectively being you repaying what is the difference between the vehicle’s worth when it’s brand-new and the amount that it’s worth once a contract is complete — on top of 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.

PCP agreements have a few other considerations to bear in mind too. For instance, 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.

Decided that you’d like to settle your PCP agreement at an earlier date than initially arranged? 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.

4.      Personal Contract Hire (PCH)

The leasing option of all the car finance types available is personal contract hire — otherwise known as PCH. 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.

A fixed monthly amount is required to be paid to a dealership in order for you to 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. 

Want to change your car on a regular basis? Then PCH will likely be the best finance option for you. 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.  

What are my options when purchasing a used car?

You can use PCP and HP agreements when purchasing a second-hand car as well. Each agreement also uses 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. 

If you’re looking to lease when looking at a used vehicle though, things get a bit more complicated. Some dealers will allow their used cars 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.


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