Car Finance Guide

Choosing a method of car finance can be as confusing as choosing a car itself. Just as there are many makes, models and specifications to pick between when opting for your vehicle of choice, there are many methods of car finance which each present their own strengths and weaknesses.

This guide will help you make an informed choice about the right method of car finance for you.

Why you should plan ahead and budget.

The most important factor when deciding on a method of car finance is to plan ahead. Make sure you research the topic (as you are doing here!) and think carefully about which car finance option suits your circumstances. Consider what you can comfortably afford each month, and how much you can afford to pay in the long term. Ensure that you consider all the options available to you when choosing car finance, having done so you will be in the best position to choose the right car finance option for your circumstances.

Also try and save money wherever you can, so shop around for the best deals, consider buying a new car online and familiarise yourself with the value of the vehicle you’re purchasing. Be mindful that car finance is calculated by your own personal circumstances, i.e. your credit worthiness, as well as current market conditions, i.e. the availability of credit in the banking and finance centre.

What are the different methods of car financing available?

There are many car finance options available to you, broadly speaking these are: buying the car outright (cash buyer); hire purchase; personal (car) loan; car leasing; and personal contract plans (PCP). The following sections examine each method and their pros and cons.

Buying the car outright: pros and cons.

If you have plenty of money to spare, buying outright is the most cost effective option as there are no interest payments, you simply pay for the value of the car. However, in some cases a ‘cash buyer’ is a less attractive proposition to the car salesperson, as they are also paid on selling finance products on the vehicle.

Advantages of buying a car outright

No interest to be paid.
You own the vehicle immediately.

Disadvantages of buying a car outright

Involves a large sum of money leaving your account at one time.
No long-term security.

Hire purchase: pros and cons.

For most this is the traditional way of financing a car. It is often arranged through a dealer but you can approach car finance companies directly if you wish. In effect you are hiring a car with a right to buy, you do not own the vehicle until every repayment is made.

Hire purchase advantages

The car is yours at the end of the term.
Interest rates and minimum deposits are generally low. Minimum deposit can be as low as 10% of the value of the car.
Total interest should be low and may be negotiable.
You can end the agreement voluntarily and settle any balance remaining on your agreement.

Hire purchase disadvantages

If you don’t keep up repayments your car may be repossessed.
Hire purchase interest rates can be higher than the best personal loan rates from other sources.
Monthly payments will be higher than leasing or PCP.

Personal loans: pros and cons.

You approach a bank or a loan provider for a car loan. You then take that cash to the dealer and buy the car outright. Your repayments are made to the loan company. Remember to shop around for a good loan rate. In the eyes of the car salesperson you are a ‘cash buyer’ and may be a less attractive proposition to them because of this, therefore the level of discount you can negotiate on the car may be less than a buyer looking to take out car finance with the car seller.

Personal loan advantages

The loan is not secured on the car so you can sell whenever you like.
Total amount of interest to pay is low compared to other options.

Personal loan disadvantages

Don’t assume it is a cheaper option than hire purchase, some dealers make commission by selling loans and so they might offer better deals.
Monthly payments can be high, especially if you have a less than excellent credit rating.

Car leasing: pros and cons

With this method of car finance you pay a monthly sum over (usually) a two to four year period and at the end of the agreement you simply hand the car back in. You never own the car though some leasing companies will give you the option to buy at the end of the term.

Car leasing advantages

Great for those who want to drive a new car every few years.
Driving a new car has many benefits such as the car including the latest safety equipment, technology, and fuel efficient engines; while the car will always be within it’s manufacturer warranty period.
Gives the ability to the driver of fixing much of their motoring costs, allowing a greater degree of budgetary responsibility.
Monthly payments are generally low, lower than Hire Purchase and PCP, and there is nothing to pay at the end.
Generally only a small deposit is required, in most cases this is three monthly payments up front.

Car leasing disadvantages

The car is never yours, though some leasing companies will give you the option to buy at the end of your lease agreement.
The long-term cost of leasing will exceed that of buying if the owner keeps his vehicle for years after the loan end. However this does not take into account any additional maintenance costs that an older car could expect to cost the owner.
You will be given a mileage limit and will be charged for exceeding it.

Personal contract plans: pros and cons

Personal contract plans (or PCP), is an increasingly popular form of car finance, and is a similar process to hire purchase but you don’t buy the car at the end of the term. Instead the manufacturer/dealer works out how much the car will be worth at the end of the term and you pay off the difference, plus interest. At the end of the term you can buy the car outright, walk away or use the difference as a deposit on your next car.

Personal contract plans advantages

Low monthly payments.
Maintenance charges are often included.
Many PCP deals also come with additional benefits for the driver, such as breakdown assistance and in come cases comprehensive insurance for the length of the agreement.
If the car is worth more than the predicted value you can sell it on; if it’s worth less you can hand it back to the car finance company.
Many PCP deals are sold based on their flexibility, people’s circumstances change, and a PCP agreement has some scope to react to any personal changes.

Personal contract plans disadvantages

You will be given a mileage limit and must stick to it if you want to return the vehicle at the end of term.
At the end of the term you do not own the car unless you are willing to pay the balloon payment or take on another loan.
Chance of a negative equity is higher than with other loans.

What other factors should you be aware of?

Always remember to ask for the ‘total amount payable’. This is the total cost to acquire the car after all interest payments and additional fees are included.

Also be aware of additional charges, such as administration and documentation fees that can be used to bump up a car finance company’s profits.

Look out for special offers too, such as 0% finance. Though on the surface this appears to be the most cost effective way of buying a car, there are often conditions attached such as paying up to a 50% deposit or paying off the loan within one year.

Finally, be wary of taking on more than you can afford. It is not a good idea to extend your mortgage to finance a car as you will pay far more in the long term. Always think about what you can comfortably manage on your budget.

Where should you go to finance a new car?

Savemoneyoncars.co.uk is one of the busiest motoring web sites in the UK and enables user to look at offers from brokers, main dealers and car supermarkets. You can look at the car financing options and cars available online at your leisure.