Saving a lot of money isn’t required when you’re purchasing a car. As Audi dealership Vindis details in this guide, there are so many finance options available to you whether you intend to buy a brand-new or second-hand set of wheels and are not wanting to pay for the vehicle outright…
The options when buying a new car
Hire purchase (HP)
Hire purchase, often shorted to HP, is one of the simplest finance methods when buying a new car. Sixteen per cent of those involved in a WhatCar? survey admitted they favoured this type of car finance.
You usually need to pay a deposit — 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.
You’ll own the vehicle outright after paying the loan in its entirety. 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 have some consumer rights attached to them as well. 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.
Until you may the final payment of the loan though, the vehicle will not be yours. 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.
Personal Contract Purchase (PCP)
Personal contract purchase — or PCP — strikes up a few similarities to 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.
This time though, the monthly installments will be paying for the depreciation in the value of the car during the contract period — as opposed to going towards the whole value like with HP. Once you reach the end of the contract term, you’ll be presented with three options with what you want to do next:
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.
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.
Trade the vehicle in and use any GFV equity as a deposit towards getting your hands on a new set of wheels.
The GFV is effectively where you repay the difference between what the vehicle is worth at the time you pick it up new from the dealership and the amount, plus the cost of interest, that it’ll be worth come the end of your contract. 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.
You will want to be aware of a few more points before taking out a PCP as well. 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.
The difference between the car’s current value and the payments which are outstanding must also be paid should you opt to settle at an earlier date. Early settlement charges sometimes apply here too, so bear that additional cost in mind too when thinking about doing this.
Personal Contract Hire (PCH)
The leasing option of the car finance types available is personal contract hire, or PCH for short. 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 will be paid to the dealer in order for you to use one of their cars. 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.
If you would like to frequently change your car, a PCH plan will be a wise 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.
You’ll need to head to a bank or building society to get 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 are usually the cheapest option when you would like to borrow money over a long period of time. 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.
There’s many more benefits to paying for a new car using a personal loan. 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.
It’s important that you keep up with all of your payments though. If not, any of your assets can be seized should you be unable to pay one of your installments — 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.
The options when buying a used car
HP finance and PCP finance can both be used in order to afford a used car too, and both using the same principles as discussed above as well. Of course, you can also take out a personal loan when looking for a way to finance a used car.
It’s a bit more complicated to lease in the used car market though. 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.