Funding a car purchase – an insider guide

It is always an idea, before you commit to the purchase of your next car, to do some research on line. That’s pretty much a no-brainer. The same can also be said for the funding solution. There are always some great deals to be had from certain dealers and manufacturer backed finance houses, however it is also sensible to do some comparisons on line and ensure that you can pre-qualify for a payment and deposit which suits the amount you are aiming to borrow. In this way dealers cannot imply that your credit score is not good enough to qualify for a certain rate and, perhaps more importantly, you will be much more resistant to being ‘up-sold’ on a car you may not be able to afford. By sticking to a budget the choice, age and price of car can be slotted into your financial plan.

There is also a feeling among many buyers that by going to a dealer with your finance already in place it is easier to concentrate on negotiating the best price. For instance when the dealer introduces a finance quote the focus will be on the monthly payment, which can be manipulated to seem competitive, whilst being used as a smokescreen to prevent a customer negotiating on the price of the car. This, of course, means that the customer may not be necessarily getting the best deal.

With finance still being the preferred method of funding a car purchase, competition is hotting up with some great deals on offer to go alongside the scrappage scheme. With PCP finance rapidly replacing traditional HP or personal loan deals, especially with the protection offered by guaranteeing the cars future value, consumers are clearly turning onto lower monthly payments and are happy to effectively ‘rent’ a vehicle every 2 or 3 years, rather than the great desire of past times of actually owning a car outright.
With buyers having become much more educated about finance and with residual values so low that the chances of equity – and therefore a good deposit – in a car remain doubtful, the change cycle for drivers is becoming much more frequent. Nearly all dealers will offer some kind of PCP package with and some even offering 4 year packages. But beware of the longer term PCP’s as these can work out to be a false economy over the longer term when you add up the total amount of the repayments.

Let’s take a look at the ways you can fund a car purchase and obtain car finance in the UK.

Buying the car outright

If you have the money to spare, buying a car outright can be a cost effective alternative as you will not be making any interest payments – the price you negotiate is the price you pay. You also have the advantage of owning the car outright from the start but it will be a large capital outlay with no long term security.

Hire purchase HP

This has long been the traditional way of financing a car and is often arranged through a dealer. You can, of course approach car finance companies direct and it will certainly be beneficial to get a broad range of quotes. In principle you are basically hiring a car which comes with a “right to buy” – but remember you do not own the vehicle until every repayment is made. HP agreements can be quite flexible and the rates fairly competitive but not as good as a personal loan from the bank and the monthly payments will be higher than a PCP. Obviously if you do not keep up with the payments then the car can be repossessed

Personal (car loan)

Basically you already have the money for a car loaned to you by a bank or building society before you venture forth to the car dealer. You buy the car outright and the repayments are made to the loan company. As always it pays to shop around. One of the advantages is that the loan is not secured against the vehicle so it’s yours to sell when you wish and generally personal loan rates are quite favourable. If, however, your credit rating is not so good the monthly payments may be quite high.

Car leasing

With a car lease you will usually pay a monthly sum over a two to four year term and at the end of the agreement you simply give the car back. Think of it as a (very) extended car hire as the car never belongs to you although some leasing some leasing companies will give you the option to buy the car at the end of the term. This option generally only requires a small deposit and at the end of the lease you just walk away (usually into another new car). Some people however, may not like the idea of never taking ownership and there will be a mileage limit on the lease with charges levied for exceeding it.

Personal Contract Plans PCP

Personal contract plan (or PCP), 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, known as the “balloon payment” Minimum Guaranteed Future Value (MGFV). 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. PCP’s offer lower monthly payments with maintenance charges often included and they also have some flexibility in that 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. Again there will be a mileage limit that needs to be adhered to and although the monthly payments will be lower a PCP can work out more expensive than HP over the full lifetime of the loan.

Some other important things to remember:

Always ask for the ‘total amount payable’ to be made clear. 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 added to the total package and increase the car finance company’s profits.

Most importantly be wary of taking on more credit than you can actually afford. It is never a good idea to extend your mortgage to finance a car as you will end up paying far more in the long term. Always think about what you can comfortably manage on your budget. Most car dealers and finance companies will provide an online car loan calculator so you can work out the affordability and it’s always best to build in a comfortable “affordability cushion” in case your circumstances change.

As with everything to do with buying a car, do your research, shop around and only settle on what you can comfortably afford.